STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.


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

	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)

													Three months ended September 30, 2022						Three months ended September 30, 2021

													Residential		Commercial		Total		Residential		Commercial		Total

													(in thousands)						(in thousands)
Income from rental operations	$	21,863	$	6,792	$	28,655	$	20,081	$	6,807	$	26,888	$	29,226	$	5,305	$	34,531	$	27,838	$	5,215	$	33,053
Expenses from rental operations		12,764		2,023		14,787		11,547		1,920		13,467		16,211		1,717		17,928		15,352		2,321		17,673
Net operating income	$	9,099	$	4,769	$	13,868	$	8,534	$	4,887	$	13,421	$	13,015	$	3,588	$	16,603	$	12,486	$	2,894	$	15,380
Depreciation and amortization																		6,120						5,551
Interest						4,690						4,636						5,081						4,671
Depreciation and amortization						5,427						5,471
Administration of REIT						885						1,136						1,471						1,007
Loss on lease terminations						—						25
Other (income)/expense						(390)						(370)
Other income																		(6,385)						(1,567)
Net income					$	3,256					$	2,523					$	10,316					$	5,718


	Nine months ended September 30, 2022						Nine months ended September 30, 2021
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Income from rental operations	$	85,222	$	16,042	$	101,264	$	80,028	$	16,708	$	96,736
Expenses from rental operations		47,964		4,945		52,909		42,564		5,515		48,079
Net operating income	$	37,258	$	11,097	$	48,355	$	37,464	$	11,193	$	48,657
Depreciation and amortization						17,865						16,634
Interest						14,882						13,261
Administration of REIT						4,087						3,267
Other income						(9,291)						(4,337)
Net income					$	20,812					$	19,832

Segment Assets and Accumulated Depreciation


As of September 30, 2022	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	728,010	$	193,649	$	921,659
Accumulated depreciation		(144,226)		(46,790)		(191,016)
Total real estate investments, net	$	583,784	$	146,859	$	730,643
Lease intangible assets, less accumulated amortization		209		5,347		5,556
Cash and cash equivalents						20,464
Restricted deposits						9,267
Investment in securities						42,062
Investment in unconsolidated affiliates						26,176
Notes receivable						7,749
Other assets, net						25,868
Total Assets					$	867,785

1813

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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


As of December 31, 2021	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	692,722	$	203,980	$	896,702
Accumulated depreciation		(133,100)		(46,055)		(179,155)
Total real estate investments, net	$	559,622	$	157,925	$	717,547
Lease intangible assets, less accumulated amortization		—		6,246		6,246
Cash and cash equivalents						51,507
Restricted deposits						9,149
Investment in unconsolidated affiliates						18,658
Notes receivable						7,457
Other assets, net						10,302
Total Assets					$	820,866

NOTE 4 – Restricted deposits and FUNDED reserves

The following table summarizes the Trust’s restricted deposits and funded reserves.


	As of September 30,		As of December 31,
	2022		2021

	(in thousands)
Tenant security deposits	$	6,218	$	5,165
Real estate tax and insurance escrows		1,154		1,355
Replacement reserves		1,895		1,791
Other funded reserves		—		838
	$	9,267	$	9,149

NOTE 5 – Investment in unconsolidated affiliates

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


			Total Investment in Unconsolidated Affiliates at
Unconsolidated Affiliates	Date Acquired	Trust Ownership Interest	September 30, 2022		December 31, 2021
Banner Building	2007	66.67%	$	(608)	$	60
Grand Forks INREIT, LLC	2003	50%		3,635		2,493
SE Savage, LLC	2019	60%		1,892		2,946
SE Maple Grove, LLC	2019	60%		1,859		2,823
SE Rogers, LLC	2020	60%		2,546		2,986
ST Oak Cliff, LLC	2021	70%		9,214		4,324
SE Brooklyn Park, LLC	2021	60%		2,995		3,026
SE Fossil Creek, LLC	2022	70%		4,643		-
			$	26,176	$	18,658

Nine months ended September 30, 2017

Nine months ended September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
64,579

$
20,619

$
85,198

$
59,990

$
20,632

$
80,622
Expenses from rental operations

35,630

5,600

41,230

32,353

5,202

37,555
Net operating income

$
28,949

$
15,019

$
43,968

$
27,637

$
15,430

$
43,067
Interest

13,938

13,740
Depreciation and amortization

16,170

16,711
Administration of REIT

4,208

4,187
Loss on lease terminations

146

299
Other (income)/expense

(5,240)

(473)
Net income

$
14,746

$
8,603

~~Segment Assets and Accumulated Depreciation~~

As of September 30, 2017

Residential

Commercial

Total

(in thousands)
Real estate investments

$
552,792

$
202,337

$
755,129
Accumulated depreciation

(73,008)

(33,265)

(106,273)

$
479,784

$
169,072

648,856
Cash and cash equivalents

20,991
Restricted deposits and funded reserves

7,894
Investment in unconsolidated affiliates

2,785
Receivables and other assets

5,617
Financing and lease costs, less accumulated amortization

776
Intangible assets, less accumulated amortization

13,863
Total Assets

$
700,782

As of December 31, 2016

Residential

Commercial

Total

(in thousands)
Real estate investments

$
514,341

$
200,959

$
715,300
Accumulated depreciation

(63,148)

(29,177)

(92,325)

$
451,193

$
171,782

622,975
Cash and cash equivalents

12,034
Restricted deposits and funded reserves

7,213
Investment in unconsolidated affiliates

3,653
Receivables and other assets

5,354
Financing and lease costs, less accumulated amortization

950
Assets held for sale

2,482
Intangible assets, less accumulated amortization

15,852
Total Assets

$
670,513

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (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 in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2022 and December 31, 2021 of $6,951 and $6,329, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns 50% interest as tenant in common through 100% ownership in a limited liability company. The property is located in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2022 and December 31, 2021 of $9,606 and $9,794, 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 holds a multifamily property. The property is encumbered by a first mortgage with a balance of $30,829 at September 30, 2022. The Trust is jointly and severally liable for the full mortgage balance. At December 31, 2021, the property was encumbered by a first mortgage of $26,210, and a second mortgage to Sterling Properties, LLLP of $6,129. Additionally, at September 30, 2022, SE Savage, LLC has an outstanding Promissory Note with Sterling Properties, LLLP, for $1,397, and is an unsecured obligation of SE Savage, LLC. The note ~~4 – real estate investments~~is considered to be additional at-risk funds to the Operating Partnership, in SE Savage, LLC, and is included in Notes Receivable on the Consolidated Balance Sheet at September 30, 2022.

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 Operating Partnership owns a 60% interest in a limited liability company that holds a multifamily property. The entity is encumbered by a first mortgage with a balance at both September 30, 2022 and December 31, 2021 of $24,788. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at September 30, 2022 and December 31, 2021 of $3,643 and $727, respectively.

~~Construction~~

The Operating Partnership owns a 60% interest in ~~progress as~~a limited liability company that is currently developing a multifamily property. The LLC holds land located in Rogers, Minnesota, with total assets of $32,516 and $22,847 at September 30, 2022 and December 31, 2021, respectively. The entity encumbered by a first mortgage has a balance of $25,742 and $15,688 at September 30, 2022 and December 31, 2021, respectively. The Company is jointly and severally liable for the full mortgage balance. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at September 30, 2022 of $2,216.

The Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of September 30, ~~2017 consists primarily~~2022, the Operating Partnership has contributed $4,939 in cash to the entity. The entity holds land located in Dallas, Texas with total assets of ~~development~~$32,608 and ~~planning costs associated~~$7,394 at September 30, 2022 and December 31, 2021, respectively. The entity is encumbered by a construction mortgage with ~~phase III~~a balance of $15,348 at September 30, 2022. There was no balance outstanding related to the construction mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company, with an unrelated third party. The entity is currently developing a multifamily ~~apartment community under construction~~property. As of both September 30, 2022, the Operating Partnership has contributed $3,042 in ~~Bismarck, North Dakota. Phase III~~cash to the LLC. The entity is located in Brooklyn Park, Minnesota, with total assets of $27,382 and $5,478 at September 30, 2022 and December 31, 2021, respectively. The entity is encumbered by a first mortgage that has a balance of $20,007 at September 30, 2022. There was no balance outstanding related to the ~~development~~first mortgage at December 31, 2021. The Company is ~~still~~jointly and severally liable for the full mortgage balance.

During the second quarter of 2022, the Operating Partnership entered into a joint venture arrangement. Through the joint venture, the Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of September 30, 2022, the ~~planning stages and construction~~Operating Partnership has ~~not yet commenced.~~ contributed $4,664 in cash to the entity. The entity holds land located in Fort Worth, Texas with total assets of $8,272 at September 30, 2022.

~~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.

2015

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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

The following is a summary of the financial position of the unconsolidated affiliates at September 30, 2022 and December 31, 2021.


	September 30, 2022		December 31, 2021

	(in thousands)
ASSETS
Real estate investments	$	202,492	$	134,839
Accumulated depreciation		(15,158)		(10,940)
		187,334		123,899
Cash and cash equivalents		2,054		1,131
Restricted deposits		856		650
Intangible assets, less accumulated amortization		349		41
Other assets, net		740		909
Total Assets	$	191,333	$	126,630

LIABILITIES
Mortgage notes payable, net	$	139,087	$	87,996
Tenant security deposits payable		192		108
Accrued expenses and other liabilities		10,415		8,029
Total Liabilities	$	149,694	$	96,133
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	41,639	$	30,497

Total liabilities and shareholders' equity	$	191,333	$	126,630

The following is a summary of results of operations of the unconsolidated affiliates for the three and nine months ended September 30, 2022


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)					(in thousands)
Income from rental operations	$	2,638	$	1,296	$	6,444	$	3,109
Expenses from rental operations		957		417		2,451		999
Net operating income	$	1,681	$	879	$	3,993	$	2,110
Depreciation and Amortization		1,316		358		4,331		871
Interest		1,178		644		2,854		1,524
Other expense		2		(9)		13		(9)
Net loss	$	(815)	$	(114)	$	(3,205)	$	(276)

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

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 September 30, 2022							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	$	15,305	$	(10,758)	$	4,547
Above-market leases		3,115		(910)		2,205		2,466		(1,457)		1,009
	$	26,622	$	(10,770)	$	15,852
							$	17,771	$	(12,215)	$	5,556
Lease Intangible Liabilities
Below-market leases	$	(3,197)	$	1,122	$	(2,075)	$	(2,380)	$	1,696	$	(684)


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

Lease Intangible Assets	(in thousands)
In-place leases	$	15,455	$	(10,381)	$	5,074
Above-market leases		2,617		(1,445)		1,172
	$	18,072	$	(11,826)	$	6,246
Lease Intangible Liabilities
Below-market leases	$	(2,525)	$	1,714	$	(811)

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)
2022 (October 1, 2022 - December 31, 2022)	$	388	$	38
2023		857		151
2024		827		151
2025		827		151
2026		676		80
Thereafter		1,981		113
	$	5,556	$	684

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

NOTE 7 – LINES OF CREDIT

We have a ~~$27,000~~$4,915 variable rate ~~(1-month LIBOR~~(floating SOFR plus ~~2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2018; and a $6,315 variable rate (prime rate less 0.5%~~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;December 2026; and ~~Grand Forks, North Dakota. We also have~~ a ~~$2,000~~$5,000 variable rate ~~(prime rate less 0.5%~~(floating SOFR plus 2.00%) ~~unsecured~~ line of credit agreement with Bremer Bank, which expires ~~October 2018; and a $3,000 variable rate (prime rate) unsecured~~December 2026. The lines of credit are secured by specific properties. At September 30, 2022, the Bremer line of credit ~~agreement with Bell Bank, which expires December 2017. At September 30, 2017, there was no~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

~~balance outstanding on the lines~~secures one letter of credit totaling $50, leaving ~~$37,015~~$9,865 available and unused under the agreements. ~~Certain~~These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. There were no balances outstanding on either line as of ~~the variable lines of credit have limits on availability based on collateral specific critieria.~~September 30, 2022 or December 31, 2021.

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~~lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As

Table 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 Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017, we were~~2022 and 2021 (UNAUDITED)

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

NOTE 8 - MORTGAGE NOTES PAYABLE

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


	Principal Balance At
	September 30,		December 31,
	2022		2021

	(in thousands)
Fixed rate mortgage notes payable (a)	$	514,297	$	490,413
Variable rate mortgage notes payable		-		5,237
Mortgage notes payable		514,297		495,650
Less unamortized debt issuance costs		2,307		2,508
	$	511,990	$	493,142

Principal Balance At

September 30,

December 31,

2017

2016

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

$
405,355

$
393,511
Less unamortized debt issuance costs

2,890

3,032

$
402,465

$
390,479

(a)

~~(a)~~

Includes ~~$2,975~~$106,717 and ~~$3,056~~$108,734 of variable rate mortgage debt that was swapped to a fixed rate at September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, respectively.

~~As of September 30, 2017, we had 127 mortgage loans with effective interest rates ranging from 2.57% to 7.25% per annum and a weighted average effective interest rate of 4.25% per annum.~~

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

~~The majority of the Company’s 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 worth ratios. As of December 31, 2016, five loans on residential properties were out of compliance due 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 in compliance with all covenants.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

Years ending December 31,

Amount

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

$
5,000
2018

20,095
2019

25,322
2020

28,001
2021

45,897
Thereafter

281,040
Total payments

$
405,355


Years ending December 31,	Amount
	(in thousands)
2022 (October 1, 2022 - December 31, 2022)	$	6,055
2023		53,006
2024		22,653
2025		53,130
2026		45,546
Thereafter		333,907
Total payments	$	514,297

NOTE 9 – DERIVATIVES AND HEDGING ACTIVITIES

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

As of September 30, 2022, the Trust used 12 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 qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. Over the next twelve months, the Trust estimates that an additional $758 will be reclassified as a decrease to interest expense.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

The following table summarizes the Trust’s interest rate swaps as of September 30, 2022, which effectively convert one month floating rate LIBOR or 30-day average SOFR to a fixed rate:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
November 1, 2019	$	6,627	3.15%	November 1, 2029
November 1, 2019	$	4,607	3.28%	November 1, 2029
January 10, 2020	$	3,001	3.39%	January 10, 2030
July 1, 2020	$	4,771	2.79%	June 10, 2030
December 2, 2020	$	12,452	2.91%	December 2, 2027
July 1, 2021	$	25,844	2.99%	July 1, 2031
November 10, 2021	$	28,187	3.54%	August 1, 2029
December 1, 2021	$	10,885	3.32%	December 1, 2031
August 15, 2022	$	1,502	3.07%	June 15, 2030
August 15, 2022	$	2,910	3.07%	June 15, 2030
August 15, 2022	$	1,627	2.94%	June 15, 2030
August 15, 2022	$	4,304	2.94%	June 15, 2030

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


	Number of Instruments			Notional
Interest Rate Derivatives	September 30, 2022	December 31, 2021		September 30, 2022		December 31, 2021
Interest rate swaps	12	12	$	106,717	$	108,734

The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the ~~notional amount of $1,294 and $2,450~~accompanying consolidated balance sheets. The valuation techniques are described in Note 10 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	September 30, 2022			December 31, 2021
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	14,356	Other assets, net	$	698
Interest rate swaps	Accrued expenses and other liabilities	$	—	Accrued expenses and other liabilities	$	1,648

The carrying ~~amount~~amounts of the swaps have been adjusted to their fair ~~values~~value at the end of the quarter, which because of changes in forecasted levels of LIBOR and 30-day average SOFR, resulted in reporting aan asset and liability for the fair value of the future net payments forecasted under the ~~swaps. The~~swap. Accounting for interest rate swaps ~~are accounted for as~~is considered an effective ~~hedges~~hedge in accordance with ASC 815-20 whereby ~~they are~~it is recorded at fair value and changes in fair value are recorded to ~~accumulated~~ comprehensive income.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

The following table presents the effect of the Trust’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the three months ended September 30, 2022 and 2021:


			Location of Gain
		Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		AOCI into Income
		2022			2022
Interest rate swaps	$	(4,967)	Interest expense	$	(71)
		2021			2021
Interest rate swaps	$	66	Interest expense	$	199



			Location of Gain
		Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		AOCI into Income
		2022			2022
Interest rate swaps	$	(15,306)	Interest expense	$	548
		2021			2021
Interest rate swaps	$	(1,473)	Interest expense	$	433

Credit-risk-related Contingent Features

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~~2022, the termination value of derivatives in an asset position was $14,356. As of September 30, 2022, the Trust has pledged the properties related to the loans which are hedged as collateral.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and ~~December 31, 2016, we recorded a liability~~2021 (UNAUDITED)

(Dollar amounts in thousands, except share and ~~other accumulated comprehensive loss of $88 and $145, respectively.~~per share data)

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


	September 30, 2022				December 31, 2021
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value

	(in thousands)
Financial assets:
Investment in securities	$	42,062	$	42,062	$	—	$	—
Notes receivable	$	7,749	$	9,073	$	7,457	$	9,840
Derivative assets	$	14,356	$	14,356	$	698	$	698

Financial liabilities:
Mortgage notes payable	$	514,297	$	493,082	$	495,650	$	508,285
Derivative liabilities	$	—	$	—	$	1,648	$	1,648

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

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

●

Level 1 – Quoted prices ~~for identical instruments~~(unadjusted) in active markets that are accessible at the measurement date for assets or liabilities as well as certain U.S. Treasury securities that are highly liquid and are actively traded in secondary 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.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

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)
September 30, 2022
Derivative assets	$	—	$	14,356	$	—	$	14,356

December 31, 2021
Derivative assets	$	—	$	698	$	—	$	698
Derivative liabilities	$	—	$	1,648	$	—	$	1,648

~~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~~

Securities: The market ~~data including forward yield curves and implied volatilities to determine the market’s expectation~~value of the ~~future cash flows of~~security investments represents the ~~variable component. The fixed and variable components of~~price the ~~derivative are then discounted using calculated discount factors developed~~investments could sell at on the open market based on ~~the LIBOR swap rate and are aggregated to arrive~~market interest rates 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 riskgiven point in ~~the fair value measurements.~~time.

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, the 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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

Fair Value Disclosures

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

Level 1

Level 2

Level 3

Total

(in thousands)
September 30, 2017

Mortgage notes payable, net

$
—

$
—

$
402,866

$
402,866
December 31, 2016

Mortgage notes payable, net

$
—

$
—

$
402,015

$
402,015


	Level 1		Level 2		Level 3		Total

	(in thousands)
September 30, 2022
Mortgage notes payable	$	—	$	—	$	493,082	$	493,082
Notes receivable	$	—	$	—	$	9,073	$	9,073
December 31, 2021
Mortgage notes payable	$	—	$	—	$	508,285	$	508,285
Notes receivable	$	—	$	—	$	9,840	$	9,840

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~~Trust for similar debt instruments of comparable maturities by the ~~Company’s~~Trust’s lenders. Judgment is used in determining the appropriate rate for each of the Company’s 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%~~4.85% to ~~4.60%~~4.90% and from ~~4.00%~~3.25% to ~~4.35%~~3.35% at September 30, ~~2017~~2022 and December 31, ~~2016~~,2021, respectively.

Notes receivable: The Trust estimates the fair value of its notes receivable by discounting future cash flows of each instrument at rates currently offered to the Trust for similar note instruments of comparable maturities by the Trust’s lenders. The fair value ~~of the Company’s matured mortgage notes payable were determined~~rate ranged from 3.25% to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of September 30, 2017. The Company’s mortgage notes payable are further described in Note 8.7.25%.

~~NOTE 11 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP~~

As of September 30, 2017 and December 31, 2016, outstanding limited partnership units totaled 17,520,000 and 16,688,000 respectively. As of September 30, 2017 and 2016, the operating partnership declared distributions of $4,336 and $3,912 respectively, to limited partners which were paid on October 16, 2017 and October 17, 2016, respectively. Distributions per unit were $0.7425 and $0.7200 during the nine months ended September 30, 2017 and 2016, respectively.

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

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

~~NOTE 12 – REDEMPTION PLANS~~

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership 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.

2522

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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

NOTE 11 – LEASES

Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $30,000 worth of securities. Currently, the fixed redemption price is $15.50 per share or unit under the plans, which price became effective March 29, 2017.

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

During the nine months ended September 30, 2017, the Company redeemed 41,000 common shares valued at $634. In addition, during the nine months ended September 30, 2017, the Company redeemed 58,000 units valued at $896.

~~NOTE 13 – BENEFICIAL INTEREST~~

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of September 30, ~~2017~~2022, we derived 83.6% 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 ~~December 31, 2016, there were 8,353,000~~non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and ~~8,001,000 common shares outstanding, respectively. We had no preferred shares outstanding as~~the timing and pattern of ~~either date.~~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.

~~Dividends paid to holders~~As of ~~common shares were $0.7425 per share and $0.7200 per share for the nine months ended~~ September 30, ~~2017 and 2016, respectively.~~

~~NOTE 14 – DIVIDEND REINVESTMENT PLAN~~

~~Our Board of Trustees approved a dividend reinvestment plan to provide existing holders~~2022, we derived 16.4% 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.

We recognize variable income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common ~~shares~~area maintenance costs which are reimbursed by tenants in accordance with ~~a method~~specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to ~~purchase additional common shares without payment of brokerage commissions, fees or service charges. On July 20, 2012, we registered~~reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and reimbursements are included within “real estate rental income” along with the ~~Securities Exchange Commission 2,000,000 common shares~~associated base rent in the accompanying consolidated financial statements.

Lease income related 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%)~~Company’s operating leases is comprised 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 and $16.00 at September 30, 2017 and December 31, 2016, respectively. See discussion of determination of estimated value in Note 18.following:


	Three months ended September 30, 2022
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	27,993	$	4,057	$	32,050
Lease income related to variable lease payments		—		1,113		1,113
Other (a)		(150)		113		(37)
Lease Income (b)	$	27,843	$	5,283	$	33,126


	Three months ended September 30, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	26,748	$	3,879	$	30,627
Lease income related to variable lease payments		—		1,130		1,130
Other (a)		(35)		174		139
Lease Income (b)	$	26,713	$	5,183	$	31,896

(a)

For the three months ended September 30, 2022 and 2021, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the three months ended September 30, 2022 and 2021 of $1,405 and $1,157, respectively, which is accounted for under the revenue recognition standard.

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

In the nine months ended September 30, 2017, 247,000 shares were issued pursuant to dividend reinvestments and 134,000 shares were issued pursuant to additional optional cash purchases under the plan.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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


	Nine months ended September 30, 2022
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	81,928	$	12,240	$	94,168
Lease income related to variable lease payments		—		3,401		3,401
Other (a)		(513)		277		(236)
Lease Income (b)	$	81,415	$	15,918	$	97,333


	Nine months ended September 30, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	76,722	$	12,531	$	89,253
Lease income related to variable lease payments		—		3,424		3,424
Other (c)		(212)		432		220
Lease Income (d)	$	76,510	$	16,387	$	92,897

(a)

For the nine months ended September 30, 2022 and 2021, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the nine months ended September 30, 2022 and 2021 of $3,931 and $3,839, respectively, which is accounted for under the revenue recognition standard.

As of September 30, 2022, non-cancelable commercial operating leases provide for future minimum rental income as follows. Residential leases are not included, as the terms are generally for one year or less.


Years ending December 31,	Amount
	(in thousands)
2022 (October 1, 2022- December 31, 2022)	$	3,897
2023		15,738
2024		15,060
2025		14,789
2026		13,541
Thereafter		57,397
	$	120,422

NOTE 1512 – 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, Inc. In connection with this restructuring transaction, the owners of Alloy Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management, Inc. 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, and by President Joel S. Thomsen. In addition, Mr. Regan serves as the Executive Chairman of the Advisor, and Messrs. Wieland, and Thomsen serve on the Board of Governors of both the Advisor and GOLDMARK Property Management, Inc.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

Sterling Management, LLC (the “Advisor”), is 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, Inc., is a North Dakota corporation formed in 1981. GOLDMARK Property Management, Inc. 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. Mr. Wieland, a Trustee, also serves as a Board Member of Bell Bank. Mr. Wieland could have an indirect material interest in any such engagement and related transactions.

The Trust has a historical and ongoing relationship with Trumont Group and Trumont Construction. Trumont Group provides development services for current joint venture projects in which the Operating Partnership is an investor. Trumont Construction has been engaged to construct the properties associated with these joint ventures. Mr. Regan, Chief Executive Officer and trustee, is a partner in both Trumont Group and Trumont Construction and has a direct material interest in any engagement or related transaction, the Trust enters into, with these entities.

Property Management Fees

During the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, we paid property management and administrative fees to GOLDMARK Property Management, ~~in an amount equal to~~Inc. of $10,485, and $9,634, respectively. Management fees which approximate 5% of net collected rents, account for $4,107 and $3,862 of ~~the properties managed by GOLDMARK. GOLDMARK Property Management is owned in part by Kenneth Regan and James Wieland. For~~these fees during the nine months ended September 30, ~~2017~~2022 and ~~2016, we paid management fees of $8,510 and $7,411, respectively, to GOLDMARK Property Management.~~2021. In addition, during the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, we paid repair and maintenance ~~related payroll~~expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling ~~$3,808~~$5,578 and ~~$3,554,~~$5,012, respectively.

~~Board of Trustee Fees~~

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

~~The plan provides:~~



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

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

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The ~~following is a brief description~~Advisor may receive fees related to management of the ~~current~~Trust, acquiring, disposing, or developing real estate property, project management fees, and ~~compensation that may be received by the Advisor~~financing fees related to lending relationships, 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, 2022, and is effective ~~January 1, 2017.~~ until March 31, 2023.

~~Management Fee: 0.35% of~~

The below table summarizes the fees incurred to 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.Advisor.


	Nine Months ended September 30,
	2022		2021

	(in thousands)
Fee:
Advisory	$	2,739	$	2,474
Acquisition	$	934	$	375
Disposition	$	631	$	146
Financing	$	83	$	146
Project Management	$	420	$	409

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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

~~majority of~~

The below table summarizes the ~~trustees, including a majority of the independent trustees, if they determine the transaction~~fees payable to ~~be commercially competitive, fair and reasonable to us.~~our Advisor.


	Payable at
	September 30,		December 31,
	2022		2021

	(in thousands)
Fee:
Advisory	$	313	$	296
Acquisition	$	58	$	-
Development	$	-	$	79
Disposition	$	30	$	-
Financing	$	4	$	38
Project Management	$	3	$	98

~~Disposition Fee: For its services~~Operating Partnership Units Issued 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.~~Connection with Acquisitions

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

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


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

~~TC = Total Project Cost~~

~~Management Fees~~

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

~~Acquisition Fees~~

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

~~Financing Fees~~

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

~~Disposition Fees~~

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

~~Development Fees~~

During the nine months ended September 30, 2017 and 2016, we incurred $235 and $107 in development fees incurred with our Advisor, respectively. As of September 30, 2017 and December 31, 2016, we owed our Advisor a total of $114 and $82 for unpaid development fees, of which $104 and $81 were for unpaid development fees as part of a 10% hold back, respectively.

2022, 510,000 Operating Partnership ~~Units Issued in Connection with Acquisitions~~

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

During the nine months ended September 30, 2016, we issued directly or indirectly 1,086,000 operating partnership units. During this period, 458,000 operating partnership units issued were issued to entitiesan entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was ~~$7,167.~~ $11,741.

~~Commissions~~

During the nine months ended September 30, 2017 and 2016, we incurred real estate commissions of $549 and $692, respectively, owed 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. There2021, there were no ~~outstanding commissions owed as of September 30, 2017 and December 31, 2016.~~Operating Partnership units issued directly or indirectly, to affiliated entities.

~~Rental Income~~Commissions

During the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, we ~~received rental income~~incurred real estate commissions of ~~$166~~$371 and ~~$161,~~$297, respectively, ~~under an operating lease agreement with~~to GOLDMARK ~~Property Management.~~Commercial Real Estate, Inc., in which Messrs. Regan and Wieland jointly own a controlling interest. As of September 30, 2022 total commissions payable to Goldmark Commercial Real Estate was $29. As of December 30, 2021, there were no unpaid commissions to GOLDMARK Commercial Real Estate.

During the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, we incurred real estate commissions of $319 and $217, respectively, to GOLDMARK Property Management. As of September 30, 2022 total commissions payable to Goldmark Property Management was $59. As of December 30, 2021, there were no unpaid commissions to GOLDMARK Property Management.

Rental Income

During the nine months ended September 30, 2022 and 2021, we received rental income of ~~$41~~$97 and ~~$39,~~$77, respectively, under an operating lease agreement with our Advisor.

During the nine months ended September 30, 2022 and 2021, we received rental income of $- and $19, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate, ~~Services,~~ Inc.

During the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, we received rental income of ~~$34~~$200 and ~~$34,~~$224, 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.

Property Management, Inc.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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

During the nine months ended September 30, 2022 and 2021, we received rental income of $639 and $278, respectively, under operating lease agreements with Bell Bank.

Other operational costs

During the nine months ended September 30, 2022 and 2021, the Trust incurred $420 and $187, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. At September 30, 2022 and December 31, 2021, operational outstanding liabilities were $3 and $-, respectively.

Other operational receipts

At September 30, 2022 and December 31, 2021, operational outstanding receivables from related parties were $42 and $128, respectively.

Debt Financing

At September 30, 2022 and December 31, 2021, the Trust had $64,691 and $66,365, respectively, of outstanding principal on loans entered into with Bell Bank. During the nine months ended September 30, 2022 and 2021, the Trust incurred interest expense on debt held with Bell Bank of $491 and $1,511, respectively. Accrued interest as of September 30, 2022 and December 31, 2021, related to this debt was $125 and $148, respectively.

Development Arrangements

During the nine months ended September 30, 2022 and 2021, the Trust incurred $717 and $51, respectively, in development fees to Trumont Group. At September 30, 2022 and December 31, 2021, the Trust owed $103 and $51, respectively, for development fees to Trumont Group.

During the nine months ended September 30, 2022 and 2021, the Trust incurred $734 and $12, respectively, in construction fees to Trumont Construction. At September 30, 2022 and December 31, 2021, the Trust owed $94 and $29, respectively for construction fees to Trumont Construction.

During the nine months ended September 30, 2022 and 2021, the Trust incurred $284 and $41, respectively, in general construction costs to Trumont Construction. At September 30, 2022 and December 31, 2021, the Trust owed $49 and $-, respectively, for general construction costs.

NOTE 1613 - 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.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

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

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

Risk of Uninsured Property Losses

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

Litigation

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

NOTE 1714 – DISPOSITIONS

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

During the nine months ended September 30, ~~2016,~~2022, the ~~operating partnership sold~~Operating Partnership disposed of four properties. One property located in Savage, Minnesota was disposed of for $2,700 with a ~~medical~~recognized gain of $1,328. One property located in ~~Eau Claire, Wisconsin~~Moorhead, Minnesota was disposed of for ~~approximately $1,400~~$6,400 with a recognized gain of $2,012. One property located in Edina, Minnesota was disposed of for $15,320 with a recognized gain of $6,728. The other property located in East Grand Forks, MN was disposed of for $1,200 with a recognized loss of $171. During the nine months ended September 30, 2021, the Operating Partnership disposed of two properties for a total of $5,850 and recognized ~~a loss~~gain of ~~$316.~~$1,710.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

NOTE 15 – ACQUISITIONS

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

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

September 30,

December 31,

2017

2016

(in thousands)
ASSETS

Real estate investments

$
—

$
2,365
Restricted deposits and funded reserves

—

22
Receivables

—

25
Notes receivable

—

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

—

28

Total Assets

$
—

$
2,482

LIABILITIES

Special assessments payable

$
—

$
103
Tenant security deposits payable

—

22

Total Liabilities

$
—

$
125

~~NOTE 18 – ACQUISITIONS~~

~~The Company closed on the following~~Trust had six acquisitions during the nine months ended September 30, ~~2017:~~2022.

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

Total Acquisition Cost

2/28/22

Deer Park

Hutchinson, MN

Apartment Complex

138 units

15,073

5/31/22

Desoto Estates

Grand Forks, ND

Apartment Complex

68 units

5,863

5/31/22

Desoto Townhomes

Grand Forks, ND

Townhomes

24 units

3,226

5/31/22

Desoto Apartments

East Grand Forks, MN

Apartment Complex

24 units

1,230

6/10/22

Diamond Bend

Mandan, ND

Apartment Complex

78 units

10,919

9/13/22

Newgate Apartments

Bismarck, ND

Apartment Complex

46 units

2,444

38,755

~~(a)~~

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

Total consideration given for acquisitions through September 30, ~~2017~~2022 was completed through issuing approximately ~~603,000~~539,000 limited partnership units of the ~~operating partnership~~Operating Partnership valued at ~~$16.00~~$23.00 per unit for an aggregate consideration of approximately ~~$9,651, 1031 tax-deferred exchange funds of $4,278, new loans of $2,392, assumed liabilities of $72 and cash of $3,718.~~$12,390. 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 2022, cash flows were reclassified to updated presentation resulting prior period to be updated to align with reclassification. The following table summarizes the acquisition date fair values, before pro-rations, the Company recorded in conjunction with the acquisitions discussed above:

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022 and ~~2016~~2021 (UNAUDITED)

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

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

~~The Company closed on the following acquisitions during the nine months ended September 30, 2016:~~

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/29/16

Titan Machinery

North Platte, NE

Implement dealership

16,480 sq. ft.

$
1,769

$
1,769
2/1/16

Bristol Park Apartments

Grand Forks, ND

Apartment complex

80 units

5,050

5,050
2/1/16

Redpath

White Bear Lake, MN

Office building

25,817 sq. ft.

4,000

4,000
3/1/16

Eagle Sky I Apartments

Bismarck, ND

Apartment complex

20 units

1,525

1,525
3/1/16

Eagle Sky II Apartments

Bismarck, ND

Apartment complex

20 units

1,525

1,525
5/4/16

Garden Grove Apartments

Bismarck, ND

Apartment complex

95 units

7,072

7,072
5/4/16

Washington Apartments

Grand Forks, ND

Apartment complex

17 units

667

667
8/1/16

Roughrider

Grand Forks, ND

Apartment complex

12 units

582

582
8/29/16

West 80 Development Land

Rochester, MN

Land

18.8 acres

900

900
9/13/16

Amberwood Apartments

Grand Forks, ND

Apartment complex

95 units

3,942

3,942

$
27,032

$
27,032

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

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

Nine Months Ended

September 30,

2017

2016

Land, building, tenant improvements and FF&E

$
20,111

$
25,822

Acquired lease intangible assets

-

1,386

Acquired lease intangible liabilities

-

(176)

Mortgages notes payable assumed

-

-

Other liabilities

(72)

(78)

Net assets acquired

20,039

26,954

Equity/limited partnership unit consideration

(9,651)

(16,940)

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

(4,278)

-

New loans

(2,392)

(2,662)

Net cash consideration

$
3,718

$
7,352


	Nine months ended
	September 30,
	2022		2021
Real estate investment acquired	$	38,296	$	39,344
Acquired lease intangible assets		749		-
Assumed Assets		3		23
Total Assets Acquired	$	39,048	$	39,367
Other liabilities		(293)		(569)
Net assets acquired		38,755		38,798
Equity/limited partnership unit consideration		(12,390)		(2,883)
Net cash consideration	$	26,365	$	35,915

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

~~Estimated Value of Units/Shares~~

The Board of Trustees determined an estimate of fair value for the trust shares in the first nine months of 2017 and 2016. In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in the first nine months of 2017 and 2016. In determining the fair value of the shares and limited partnership units, the board relied upon their experience with, and knowledge about, our real estate portfolio and debt obligations. The board typically determines the share price in March of each year. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information.

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

Based on the results of the methodologies, the Board determined the fair value of the shares and limited partnership units to be $16.00 per share/unit effective March 23, 2016. The Board determined the fair value of the shares and limited partnership units to be $16.50 per share/unit effective March 29, 2017.

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

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

NOTE 1916 - SUBSEQUENT EVENTS

On October ~~16, 2017,~~17, 2022, we paid a dividend or distribution of ~~$0.2475~~$0.2875 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.~~2022.

As of September, 2022, we had certain acquisitions and dispositions in process. Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.

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

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Table of Contents

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

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

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

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

Overview

~~We operate~~Sterling Real Estate Trust d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as ~~an Umbrella Partnership~~a Real Estate Investment Trust (UPREIT), which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we hold all or substantially all of our assets through our operating partnership. We control the operating partnership as the sole general partner and own approximately 32.28%(“REIT”) under Sections 856-860 of the ~~operating partnership as of September 30, 2017. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, our proportionate shares~~Internal Revenue Code, which requires that 75% of the assets ~~and income~~ of ~~our operating partnership are deemed to be~~a REIT consist of real estate assets and that 75% of its gross income be derived from real estate. The net income of the ~~trust.~~

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

~~Operating Partnership~~

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

regular corporation. Our real estate portfolio consisted of ~~164~~184 properties containing ~~9,335~~11,018 apartment units and approximately ~~1,691,000~~1,512,000 square feet of leasable commercial space as of September 30, ~~2017.~~2022. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately ~~$648,856,~~$730,643, which includes construction in progress. ~~Effective January 1, 2016,~~ Sterling’s current acquisition strategy and focus is ~~solely~~ on multifamily apartment properties. ~~We currently have no plans~~

Critical Accounting Estimates

Below are accounting policies and estimates that management believes are critical to ~~dispose~~the preparation of ~~our existing commercial properties.~~

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

~~Table of Contents~~

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

~~Our Board~~particularly important for an understanding of ~~Trustees~~the financial position and ~~Executive Officers~~

~~We operate under~~results of operations presented in the ~~direction~~historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our Board of Trustees, the members of which are accountable to us and our shareholders. Our trustees are elected annually by our shareholders. In addition, the Board has a duty to supervise our relationship with the Advisor and evaluates the performance of and fees paidconsolidated financial statements (see Note 2 to the ~~Advisor on an annual basis. The Advisory Agreement was approved~~unaudited consolidated financial statements). These policies require the application of judgment and assumptions by ~~the Board of Trustees (including all the independent trustees) on April 6, 2017, effective January 1, 2017. Our Board of Trustees has provided investment guidance for the Advisor to follow,~~management and, ~~must approve each investment recommended by the Advisor. Currently, we have nine members on our board, seven of whom are independent.~~

~~Our Advisor~~

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

~~Conflicts of Interest~~

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

Table of ~~our relationship with our trustees, executive officers, key personnel and our Advisor and its affiliates. Some~~Contents

Impairment of Real Estate Investments

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

~~Our trustees and officers and the officers and key personnel~~Examples of ~~our Advisor (herein individually and collectively our “Leadership”) may spend a portion of their time on activities unrelated to us, which may significantly reduce the amount of time~~situations considered to be ~~spent~~impairment indicators include, but are not limited to:

a substantial decline or negative cash flows;

continued low occupancy rates;

continued difficulty in leasing space;

significant financially troubled tenants;

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

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

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

If the presence of one or more ~~of our Leadership on Sterling activities. Each of our Leadership, including Messrs. Regan and Weiland,~~impairment indicators as described above is ~~currently expected to spend a significant portion of their time on our behalf, but may not always spend a majority of their time on our behalf.~~

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

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

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

projected capital expenditures;

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

comparable selling prices; and

property specific discount rates for fair value estimates as necessary.

~~Table of Contents~~

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

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

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

~~Leadership may engage for their own account in business activities~~excess of the types conducted or to be conducted by Sterling or our subsidiaries. To the extent Leadership takes actions that are more favorable to other entities than to us, these actions could have a negative impact on Sterling’s financial performance and, consequently, on dividends to our shareholders and thecarrying value of ~~our stock.~~ the asset over its fair value. Based on evaluation, there were no impairment losses during the nine months ended September 30, 2022 and 2021.

~~Interests in Other Real Estate Programs~~

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

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

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

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

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

~~Table of Contents~~

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

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

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

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

~~Joint Ventures with Affiliates~~

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

~~Conflict Resolution~~

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

~~Critical Accounting Estimates~~

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

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the nine months ended September 30, ~~2017~~2022 included elsewhere in this report.

Table of Contents

Principal Business Activity

~~Specific Achievements~~

Sterling currently owns directly and indirectly 184 properties. The Trust’s 141 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 43 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 77.4% residential and 22.6% commercial (based on cost) and total $730,643 in real estate investments at September 30, 2022. Sterling’s current acquisition strategy and primary focus is on multifamily apartment properties. We currently have no plans to actively market our existing commercial properties for sale. We will consider unsolicited offers for purchase of non-multifamily properties on a case-by-case basis.


Residential Property	Location	No. of Properties	Units
	North Dakota	121	7,175
	Minnesota	15	3,040
	Missouri	1	164
	Nebraska	4	639
		141	11,018

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	20	780,000
	Arkansas	2	28,000
	Colorado	1	17,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	10	530,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		43	1,512,000

Results of Operations

Management Highlights

●

Increased revenues from rental operations by ~~$4,576~~$1,478 or ~~5.7%~~4.5% for the three months ended September 30, 2022, compared to the same three month period in 2021.

●

Increased revenues from rental operations by $4,528 or 4.7% for the nine months ended September 30, ~~2017,~~2022, compared to same nine month period in ~~2016.~~

2021.

●

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

2022.

~~Table of Contents~~

●

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

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

nine months ended September 30, 2022.

●

Declared ~~and paid~~ dividends aggregating ~~$0.7425~~$0.8625 per common share for the ~~first~~ nine months ~~of 2017.~~

ended September 30, 2022

Table of Contents

Results of Operations for the Three Months Ended September 30, ~~2017~~2022 and ~~2016~~2021


													Three months ended September 30, 2022						Three months ended September 30, 2021
													Residential		Commercial		Total		Residential		Commercial		Total

	Three months ended September 30, 2017						Three months ended September 30, 2016
	Residential		Commercial		Total		Residential		Commercial		Total
	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
													(unaudited)						(unaudited)
													(in thousands)						(in thousands)
Real Estate Revenues	$	21,863	$	6,792	$	28,655	$	20,081	$	6,807	$	26,888	$	29,226	$	5,305	$	34,531	$	27,838	$	5,215	$	33,053
Real Estate Expenses
Real Estate Taxes		2,404		782		3,186		1,726		634		2,360		2,955		610		3,565		2,743		746		3,489
Property Management Fees		2,933		204		3,137		2,519		252		2,771
Property Management														3,482		241		3,723		3,419		540		3,959
Utilities		1,534		384		1,918		1,321		388		1,709		2,241		364		2,605		1,990		350		2,340
Repairs and Maintenance		5,539		631		6,170		5,663		625		6,288		6,512		479		6,991		6,375		654		7,029
Insurance		354		22		376		318		21		339		1,021		23		1,044		825		31		856
Total Real Estate Expenses		12,764		2,023		14,787		11,547		1,920		13,467		16,211		1,717		17,928		15,352		2,321		17,673
Net Operating Income	$	9,099	$	4,769		13,868	$	8,534	$	4,887		13,421	$	13,015	$	3,588		16,603	$	12,486	$	2,894		15,380
Interest						4,690						4,636						5,081						4,671
Depreciation and amortization						5,427						5,471						6,120						5,551
Administration of REIT						885						1,136						1,471						1,007
Loss on lease terminations						—						25
Other (income)/expense						(390)						(370)
Other income																		(6,385)						(1,567)
Net Income					$	3,256					$	2,523					$	10,316					$	5,718


Net Income Attributed to:
Noncontrolling Interest					$	2,174					$	1,638					$	6,548					$	3,614
Sterling Real Estate Trust					$	1,082					$	885					$	3,768					$	2,104
Dividends per share (1)					$	0.2475					$	0.2400					$	0.2650					$	0.2647
Earnings per share					$	0.13					$	0.11					$	0.35					$	0.21
Weighted average number of common shares						8,356						7,891						10,685						10,215

(1)

~~(1)~~

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

Revenues

Property revenues of ~~$28,655~~$34,531 for the three months ended September 30, ~~2017~~2022 increased ~~$1,767~~$1,478 or ~~6.6%~~4.5% in comparison to the same period in ~~2016.~~2021. Residential property revenues increased ~~$1,782~~$1,388 and commercial property revenues ~~decreased $ (15).~~increased $90.

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


	September 30,		September 30,
	2017		2016

					September 30,		September 30,
					2022		2021
Residential occupancy	94.1	%	94.2	%	93.4	%	94.4	%
Commercial occupancy	95.7	%	95.9	%	88.4	%	78.2	%

Residential revenues for the three months ended September 30, ~~2017~~2022 increased ~~$1,782~~$1,388 or 5.0% in comparison to the same period for ~~2016.~~2021. Residential properties acquired since January 1, ~~2016~~2021 contributed approximately ~~$1,563~~$1,007 to the increase in total residential revenues in the three months ended September 30, ~~2017. Rental income from~~2022. The increase is also attributed to a $186 increase in Ratio Utility Billing Systems (RUBS) for total residential ~~properties~~

~~Table of Contents~~

~~owned for more than one year increased approximately $219~~revenues in ~~comparison to~~ the ~~same period~~three months ended September 30, 2022. The increase in ~~2016.~~RUBS revenue is partially offset by an increase in utility expense, as noted below. Residential revenues comprised ~~76.3%~~84.6% of total revenues for the three months ended September 30, ~~2017~~2022 compared to ~~74.7%~~84.2% of total revenues for the three months ended September 30, ~~2016. The residential occupancy rates for the three months ended September 30, 2017 were comparable to September 30, 2016.~~2021.

Table of Contents

For the three months ended September 30, ~~2017~~2022 total commercial revenues ~~decreased $15~~increased $90 or 1.7% in comparison to the same period for 2016. Revenues from commercial properties acquired since January 1, 2016, contributed approximately $2 to the decrease in total commercial revenues in the three months ended September 30, 2017. Rental income from commercial properties owned for more than one year decreased approximately $13 in comparison to the same period in 2016.2021. The ~~decrease in revenues was~~increase is primarily attributed to ~~decreases~~full occupancy at an office park located in ~~straight-line rent adjustments and~~Fargo, ND, partially offset by the ~~sale~~dispositions of ~~the Fargo retail property.~~two commercial properties. Commercial revenues comprised ~~23.7%~~15.4% of the total revenues for the three months ended September 30, ~~2017~~2022 compared to ~~25.3%~~15.8% of total revenues for the three months ended September 30, ~~2016. The commercial occupancy rates for the three months ended September 30, 2017 are comparable to the three months ended September 30, 2016.~~2021.

Expenses

Residential expenses from operations of ~~$12,764~~$16,211 during the three months ended September 30, ~~2017~~2022 increased ~~$1,217~~$859 or ~~10.5%~~5.6% in comparison to the same period in ~~2016. This~~2021. The increase ~~was~~is primarily attributed to ~~the~~a $196 or 23.8% increase in ~~number~~property insurance, as well as an increase in real estate taxes of ~~residential~~$212 or 7.7%, and utility expense of $251 or 12.6%. These increases are primarily attributed to properties ~~owned~~acquired after January 2021. Properties acquired after January 1, 2021, account for $137 of the property management fees increase 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.2022.

Commercial expenses from operations of ~~$2,023~~$1,717 during the three months ended September 30, ~~2017 increased $103~~2022 decreased $604 or ~~5.4%~~26.0% in comparison to the same period in ~~2016.~~2021. The ~~increase was~~decrease is primarily attributed to ~~increases~~decreased property management expense of $299 or 55.4% for an office building located in Minneapolis, MN in which increased advertising and marketing expenses were incurred during 2021 in an effort to lease up vacant space. The decrease is also attributable to a decrease in real estate taxes ~~for one Bloomington, Minnesota office property~~of $134 or 61.8% and ~~North Dakota properties.~~ a decrease to repairs and maintenance expense of $175 or 26.8%.

Interest expense of ~~$4,690~~$5,081 during the three months ended September 30, ~~2017~~2022 increased ~~$54~~$410 or 8.8% in comparison to the same period in ~~2016 due to increased levels of debt outstanding (an aggregate increase of $8,357).~~2021. Interest expense ~~was approximately 16.4% and 17.2% of rental income for~~related to financing activities increased by $393 during the three months ended September 30, ~~2017 and 2016, respectively.~~

~~Depreciation and amortization~~2022 as compared to the same period in 2021. The primary reason for increased interest expense ~~decreased 0.8% from $5,471 for~~on debt is due to increased mortgage balance on the portfolio as a whole. During the three months ended September 30, ~~2016 to $5,427 for~~2022 interest expense was 14.7% of total revenues.

Depreciation and amortization expense of $6,120 during the three months ended September 30, ~~2017. The $44 net decrease was primarily a result of a $236 decrease~~2022 increased $569 or 10.3% in ~~amortization related~~comparison to ~~lease intangibles that are fully amortized.~~the same period in 2021. Properties acquired since January 1, 2021 contributed approximately $482 to the increase in depreciation expense during the three months ended September 30, 2022. Amortization expense will continue to decrease as lease intangibles become fully ~~amortized.~~

REIT administration expenses decreased from $1,136 for the three months ended September 30, 2016 to $885 for the three months ended September 30, 2017 due to a decrease in acquisition expenses related to lower acquisition activity in 2017 compared with the same period in 2016.

~~Net Operating Income~~

~~We measure the performance~~amortized but will increase upon acquisitions 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~~intangible assets. 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 activitiesexpense as a ~~measure~~percentage of ~~financial performance.~~

Residential NOI increased $565 or 6.6% for the three months ended September 30, 2017 in comparison to the same three month period in 2016 primarily as a result of an increase in revenues. Commercial NOI decreased $118 or 2.4% for the three months ended September 30, 2017 in comparison to the same three month period in 2016. The decrease

~~Table of Contents~~

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

~~Net Income~~

~~Net~~rental income for the three months ended September 30, ~~2017~~2022 and 2021 was ~~$3,256 compared to $2,523 for~~17.7% and 16.8%, respectively.

REIT administration expenses of $1,471 during the three months ended September 30, ~~2016. The increase was primarily attributed~~2022 increased $464 or 46.1% in comparison to the same period in 2021, due to an increase of ~~$447 in net operating~~REIT advisory fees paid.

Other income ~~and a decrease~~ of ~~$299 in acquisition fees. There were no acquisition fees expensed in~~$6,386 during the three months ended September 30, ~~2017 due~~2022 increased $4,819 or 307.5% in comparison to the ~~Company’s early adoption~~same period in 2021. This is primarily attributable to an increase in realized gains on sale of ~~ASU 2017-01~~real estate investments of $6,557 as compared to 2021, partially offset by a decrease in settlement proceeds for $985 or 98.50% compared to the same period in 2021.

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

Results of Operations for the Nine Months Ended September 30, ~~2017~~2022


	Nine months ended September 30, 2022						Nine months ended September 30, 2021
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	85,222	$	16,042	$	101,264	$	80,028	$	16,708	$	96,736
Real Estate Expenses
Real Estate Taxes		8,765		1,935		10,700		8,025		2,098		10,123
Property Management		10,430		598		11,028		9,709		1,043		10,752
Utilities		8,215		982		9,197		6,648		809		7,457
Repairs and Maintenance		17,800		1,347		19,147		15,819		1,478		17,297
Insurance		2,754		83		2,837		2,363		87		2,450
Total Real Estate Expenses		47,964		4,945		52,909		42,564		5,515		48,079
Net Operating Income	$	37,258	$	11,097		48,355	$	37,464	$	11,193		48,657
Interest						14,882						13,261
Depreciation and amortization						17,865						16,634
Administration of REIT						4,087						3,267
Other income						(9,291)						(4,337)
Net Income					$	20,812					$	19,832

Net Income Attributed to:
Noncontrolling Interest					$	13,262					$	12,713
Sterling Real Estate Trust					$	7,550					$	7,119
Dividends per share⁽¹⁾					$	0.5750					$	0.5300
Earnings per share					$	0.7100					$	0.7100
Weighted average number of common shares						10,572						10,095

Nine months ended September 30, 2017

Nine months ended September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)

(in thousands)

(in thousands)
Real Estate Revenues

$
64,579

$
20,619

$
85,198

$
59,990

$
20,632

$
80,622
Real Estate Expenses

Real Estate Taxes

6,168

2,221

8,389

5,144

1,876

7,020
Property Management Fees

8,527

636

9,163

7,428

667

8,095
Utilities

5,399

1,064

6,463

4,695

1,020

5,715
Repairs and Maintenance

14,493

1,610

16,103

14,118

1,585

15,703
Insurance

1,043

69

1,112

968

54

1,022
Total Real Estate Expenses

35,630

5,600

41,230

32,353

5,202

37,555
Net Operating Income

$
28,949

$
15,019

43,968

$
27,637

$
15,430

43,067
Interest

13,938

13,740
Depreciation and amortization

16,170

16,711
Administration of REIT

4,208

4,187
Loss on lease terminations

146

299
Other (income)/expense

(5,240)

(473)
Net Income

$
14,746

$
8,603

Net Income Attributed to:

Noncontrolling Interest

$
9,925

$
5,607
Sterling Real Estate Trust

$
4,821

$
2,996
Dividends per share (1)

$
0.7425

$
0.7200
Earnings per share

$
0.5900

$
0.3800
Weighted average number of common shares

8,234

7,791

(1)

~~(1)~~

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

Revenues

Property revenues of ~~$85,198~~$101,264 for the nine months ended September 30, ~~2017~~2022 increased ~~$4,576~~$4,528 or ~~5.7%~~4.7% in comparison to the same period in ~~2016.~~2021. Residential property revenues increased ~~$4,589~~$5,194 and commercial property revenues decreased ~~$(13).~~$666, from the prior year’s comparable nine month period.

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


	September 30,		September 30,
	2017		2016

					September 30,		September 30,
					2022		2021
Residential occupancy	94.9	%	95.2	%	94.4	%	94.1	%
Commercial occupancy	96.7	%	95.6	%	88.4	%	78.2	%

~~Table of Contents~~

Residential revenues for the nine months ended September 30, ~~2017~~2022 increased ~~$4,589~~$5,194 or 6.5% in comparison to the same period for ~~2016.~~2021. Residential properties acquired since January 1, ~~2016~~2021 contributed approximately ~~$4,044~~$4,176 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~~2022. Increased lease renewals, resulting in ~~comparison~~decreased rental incentives contributed to the ~~nine months ended September 30, 2016.~~rental income increase, as well as increased rent charges at the stabilized properties. Residential revenues comprised ~~75.8%~~84.2% of total revenues for the nine months ended September 30, ~~2017~~2022 compared to ~~74.4%~~82.7% 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.~~ 2021

For the nine months ended September 30, ~~2017,~~2022, total commercial revenues decreased ~~$(13)~~$666 or 4.0% 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, 2016.2021. The decrease ~~was primarily~~is attributed to the sale of commercial building for resulting in a ~~retail property~~$512 decrease in ~~June 2017 which contributed~~revenue. The decrease is also attributed to ~~nine months~~an early termination fee of ~~revenues in 2016 but only six months of revenue in 2017.~~$173. Commercial revenues comprised ~~24.2%~~15.8% of the total revenues for the nine months ended September 30, ~~2017~~2022 compared to ~~25.6%~~17.3% of total revenues for the nine months ended September 30, ~~2016.~~2021.

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Expenses

Residential expenses from operations of $47,964 during the nine months ended September 30, 2022 increased $5,400 or 12.7% in comparison to the same period in 2021. The ~~commercial occupancy rates~~increase is primarily attributed to increased repairs and maintenance expense of $1,981 or 12.5%, included in that is an increase in snow removal for $434. Properties acquired since January 1, 2021 contributed $409 to the overall increase in repairs and maintenance. The increase is also attributed to increased real estate taxes of $740 or 9.2%. Further, the increase is attributed to increased utility expense of $1,567 or 23.6%, mainly in the Minneapolis, Minnesota and Fargo, North Dakota market.

Commercial expenses from operations of $4,945 during the nine months ended September 30, 2022 decreased $570 or 10.3% in comparison to the same period in 2021. During the nine months ended September 30, 2022 property management fees decreased by $445 or 42.7%. This was related to increased advertising and marketing expenses incurred in 2021 for an office building located in Minneapolis, Minnesota in efforts to lease up vacant space.

Interest expense of $14,882 during the nine months ended September 30, 2022 increased $1,621 or 12.2% in comparison to the same period in 2021 Interest expense related to financing activities increased by $1,429 during the nine months ended September 30, 2022 as compared to the same period in 2021. The primary reason for the increase in interest expense related to debt is due to the increase of mortgage principle of the Trust’s debt portfolio. Capitalized interest expense related to construction in progress decreased $127 during the nine months ended September 30, 2022, compared to the same period in 2021. During the nine months ended September 30, 2022, interest expense was 14.7% of total revenues

Depreciation and amortization expense of $17,865 for the nine months ended September 30, ~~2017~~2022 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~~$1,231 or ~~10.1%~~7.4% in comparison to the same period in ~~2016. This increase was attributed~~2021. Properties acquired since January 1, 2021, contributed approximately $1,368 to the increase in the number of residential properties owned during the nine months ended September 30, 2017 versus the same period in 2016. In addition, increases in property management fees of $1,099 or 14.8% due to increased competition for labor, increases in utilities of $704 or 15.0% and increases in repair and maintenance expenses of $375 or 2.7% reflect the investments made to position properties for continued rate increases, tenant retention, and market competitiveness.

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

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

Depreciation and amortization expense decreased 3.2% from $16,711 for the nine months ended September 30, 2016 to approximately $16,170 for the nine months ended September 30, 2017. The $541 decrease was primarily a result of a $929 decrease in amortization related to lease intangibles that are fully amortized.depreciation expense. Amortization expense will continue to decrease as lease intangibles become fully ~~amortized.~~amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the nine months ended September 30, ~~2017~~2022 and ~~2016~~2021 was relatively consistent at ~~19.0%~~17.6% and ~~20.7%~~17.2%, respectively.

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

REIT administration expenses ~~increased from $4,187~~of $4,087 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~~2022 increased $820 or 25.1% in comparison to the same period in ~~2016.~~ 2021. The increase is attributed to an increase of REIT advisory fees paid during the year 2022 as compared to 2021.

~~Table~~Other income of ~~Contents~~

~~Net Operating Income~~

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

~~Residential NOI increased $1,312 or 4.7%~~$9,291 for the nine months ended September 30, ~~2017~~2022 increased $4,954 or 114.2% in comparison to the same ~~nine month~~ period in ~~2016 due primarily to a $4,589~~2021. The 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~~is attributed to ~~decreased revenues due~~realized gains on sale of $8,187 as compared to prior year for the sale of ~~a retail property~~four properties. This is offset by the decrease in ~~June 2017~~gain from involuntary conversion of $633 and a ~~medical property~~decrease in ~~April 2016~~equity in affiliates of $1,740, caused by depreciation expense related to two developments being put into service.

Construction in Progress and ~~increased~~Development Projects

The Trust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes, ~~for one Bloomington, Minnesota office property~~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 September 30, 2022, consists primarily of construction at residential properties located in 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 nine months ended September 30, 2017~~

We acquired ten properties for a total of $20,111 during the nine months ended September 30, 2017. Total consideration for the acquisitions was the issuance of approximately $9,651 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 cash of $3,718. In addition, there was a change in control over a real estate investment, with the operating partnership acquiring the other tenant in common’s 59.74% ownership interest in a 144 unit property (See Note 2 and 19 of the consolidated financial statements). We estimated the property had a fair value of approximately $10,080. The operating partnership assumed a loan of $1,295 and issued $4,727 of limited partnership units for a total purchase price of approximately $6,022. The Company accounted for this as a business combination and recognized a gain on change in control of real estate investment of $2,186 in the second quarter of 2017 as a result of remeasuring the carrying value to fair value.

~~During the nine months ended September 30, 2017, the operating partnership sold a retail property~~Minnesota. Prairiewood Meadows located in Fargo, North Dakota ~~for approximately $4,400 and recognized a gain of $2,072.~~

~~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 unitsconsists of the ~~operating partnership,~~re-development of one building due to a fire and a water main break, and includes a new ~~loans~~club house for residents, parking lot additions and repairs and replacement of ~~$2,662, assumed liabilities~~windows and patio doors on the other two buildings. The re-development of ~~$78~~one building is substantially complete and ~~cash~~is pending final invoices to be received. The parking lot and clubhouse will remain in construction phase throughout the fourth quarter of ~~$7,352.~~

~~During~~2022. The current budget for this property is $4,271 of which $3,322 has been incurred and accrued for in construction in progress. Georgetown-on-the-River, located in Minneapolis, had a fire occur in early January 2022 that caused significant damage to the ~~nine months ended September 30, 2016,~~property. Repairs to the ~~operating partnership sold a medical property~~damaged units, that are being tracked in ~~Eau Claire, Wisconsin for approximately $1,400 and recognized a loss of $316. The property sale was pursuant to an option exercise~~construction-in-progress, now totals $284 with expected completion in the ~~tenant’s lease.~~

~~See Notes 17 and 18 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the nine months ended September 30, 2017 and 2016.~~

fourth quarter of 2022 pending final inspections. Rosedale Estates, located in Roseville, MN will be creating a parking structure in 2023. The current

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budget is $5,142 and is in the beginning stages of engineering. Remaining construction in progress projects are primarily related to parking lot replacements, roof upgrades, and various property upgrades on multiple residential properties.

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

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

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

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

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

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

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

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The following tables include calculations of FFO, ~~and MFFO,~~ and the reconciliations to net income, for the three and nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

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

Three months ended  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 and MFFO are calculated on a per share and unit basis.~~


	Three months ended September 30, 2022			Three months ended September 30, 2021
			Weighted Avg			Weighted Avg
			Shares and			Shares and
	Amount		Units	Amount		Units

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	3,768	10,685	$	2,104	10,215

Add back:
Noncontrolling Interest - Operating Partnership Units		6,601	18,651		3,753	18,256
Depreciation & Amortization from continuing operations		6,120			5,550
Pro rata share of unconsolidated affiliate depreciation and amortization		782			207
Subtract:
Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(6,557)			—
Funds from operations applicable to common shares and limited partnership units (FFO)	$	10,714	29,336	$	11,614	28,471

Nine months ended September 30, 2017

Nine months ended September 30, 2016

Weighted Avg

Per

Weighted Avg

Per

Shares and

Share and

Shares and

Share and


Amount

Units(1)

Unit (2)

Amount

Units(1)

Unit (2)

(unaudited)

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

$
4,821

8,234

$
0.59

$
2,996

7,791

$
0.38

Add back:

Noncontrolling Interest - OPU

10,147

17,330

6,109

15,880

Depreciation & Amortization from continuing operations

16,170

16,711

Pro rata share of unconsolidated affiliate depreciation & amortization

288

355

Loss on sale of depreciable real estate investments

—

316

Subtract:

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

(4,261)

—

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

27,165

25,564

$
1.06

26,487

23,671

$
1.12
Add back:

Acquisition, and disposition expenses

1,375

1,526

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

$
28,540

25,564

$
1.12

$
28,013

23,671

$
1.18

~~(1)~~

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

~~(2)~~

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


	Nine months ended September 30, 2022			Nine months ended September 30, 2021
			Weighted Avg			Weighted Avg
			Shares and			Shares and
	Amount		Units	Amount		Units

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	7,550	10,572	$	7,119	10,095

Add back:
Noncontrolling Interest - Operating Partnership Units		13,277	18,594		12,862	18,236
Depreciation & Amortization from continuing operations		17,865			16,634
Pro rata share of unconsolidated affiliate depreciation and amortization		2,514			499
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(9,897)			(1,710)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	31,309	29,166	$	35,404	28,331

~~Table of Contents~~

Liquidity and Capital Resources

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.

Our principal demands for funds will be for ~~the~~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, development projects, 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~~Operating Partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary.

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As of September 30, 2022, our unrestricted cash resources consisted of cash and cash equivalents totaling $20,464. Our unrestricted cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of $50,972, which could potentially be used as collateral to secure additional financing in future periods.

We ~~expect~~have a $4,915 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in December 2026; and a $5,000 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires December 2026. The lines of credit are secured by specific properties. At September 30, 2022, the Bremer line of credit secures one letter of credit totaling $50, leaving $9,865 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. There were no balances outstanding on either line as of September 30, 2022 or December 31, 2021.

The Trust also has a line of credit secured by our Treasury Bill purchases. This variable rate (WSJ Prime minus 1.00%) line of credit allows for the borrowing of up to $20,000 or 90% of the investment value, whichever is less. This line of credit expires in September 2023 and provides liquidity to the Trust if needed by drawing against our Treasury investments. There was no balance outstanding on this line as of September 30, 2022.

Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.

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 the Trust.

During the nine months ended September 30, 2022, we did not sell any common shares in a private placement. During the nine months ended September 30, 2022, we issued 252,000 and 133,000 common shares for $8,561 under the dividend reinvestment plan, through dividends reinvested and the optional share purchases. During the nine months ended September 30, 2022, we did not sell any common shares in a private placement. During the nine months ended September 30, 2021, we issued 269,000 and 150,000 common shares for $8,121, under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively.

Additionally, to reduce our cash investment and liquidity needs, the Trust utilizes the UPREIT structure whereby we can acquire property in whole or in part by issuing partnership units in lieu of cash payments. During the nine months ended September 30, 2022, the Trust issued 539,000 limited partnership units of the Operating Partnership valued at $23.00 per unit for an aggregate consideration of approximately $12,390 for the purchase of real estate investments. During the nine months ended September 30, 2021, the Trust issued 144,000 limited partnership units of the Operating Partnership valued at $20.00 per unit for an aggregate consideration of approximately $2,883 for the purchase of real estate investments.

The Board of Trustees, acting as general partner for the Operating Partnership, determined an estimate of fair value for the limited partnership units exchanged through the UPREIT structure. 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 fair value on an annual basis. The Trustees determine the fair value, in their sole discretion and use data points to guide their determination which is typically based on a consensus of opinion. 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. 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. 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.

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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.

Cash on hand, together with cash from operations and access to the lines of credit, is expected to provide sufficient capital to meet ~~cash~~the Company’s needs for ~~acquisitions~~at least the next 12 months and ~~other real-estate investments from~~as appropriate, we will use cash ~~flow~~flows from operations, net proceeds offrom share offerings, debt proceeds, and ~~debt proceeds.~~proceeds from the disposition of real estate investments to meet long term liquidity demands.

~~Evaluation of Liquidity~~

Credit Quality of Tenants

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

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

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

Lease Expirations and Occupancy

~~No significant~~Generally our residential leases are ~~scheduled to expire~~for a term of one year or ~~renew in the next twelve months.~~less. 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.~~property.

Cash Flow Analysis

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

~~Table of Contents~~

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


	Nine months ended
	September 30,
	2022		2021

	(in thousands)
Net cash flows provided by operating activities	$	28,757	$	32,840
Net cash flows used in investing activities	$	(63,078)	$	(49,112)
Net cash flows provided by financing activities	$	3,396	$	21,684

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)

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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,~~costs, 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~~$28,757 and ~~$26,799~~$32,840 for the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. ~~The funds generated for the nine months ended September 30, 2017 and 2016 were primarily from property operations of our real estate portfolio.~~

Investing Activities

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

Net cash used in investing activities was ~~$10,650~~$63,078 and ~~$13,129~~$49,112 for the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, cash flows used in investing activities related ~~primarily~~specifically to the acquisition of properties and capital expenditures was ~~$12,840~~$34,616 and ~~$14,870, respectively,~~$49,522, respectively. For the nine months ended September 30, 2022 and ~~the changes~~2021, cash flows used in ~~restricted cash for replacement reserve escrows~~investing activities related to U.S. Treasury bill purchase was ~~$ (952)~~$42,000 and ~~$ (819)~~$-, respectively. ~~In addition,~~Proceeds of $1,049 and $4,095 were received from involuntary conversions during the nine months ended September 30, ~~2017,~~2022 and 2021. In addition, proceeds of ~~$4,442~~$22,429 and $5,590 were generated from the ~~sale~~sales of one commercial retail property and the sale of vehicles. The proceeds from the sale of the commercial retail property of $4,278 were deposited into a 1031 exchange escrow at June 30, 2017 and used on July 3, 2017. In addition,real estate investments during the nine months ended September 30, ~~2017, proceeds of $1,937 were received from involuntary conversions. The majority of the proceeds were related to one property that was damaged in 2016. During~~2022 and 2021. For the nine months ended September 30, ~~2016, proceeds of $1,404 were generated from the sale of one commercial medical property~~2022 and ~~the sale of one vehicle. In addition, during the nine months ended September 30, 2016, proceeds of $915 were received from involuntary conversions.~~2021, cash flows used for investment in unconsolidated affiliates was $10,068 and $5,845 respectively.

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 provided by financing activities was $3,396for the nine months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022, we paid $18,824 in dividends and distributions, redeemed $1,863 of shares and units, received $37,569 from new mortgage notes payable, and made mortgage principal payments of $16,239. Net cash used in financing activities was ~~$8,111 and $3,966~~$21,684 for the nine months ended September 30, ~~2017 and 2016, respectively. During the nine months ended September 30, 2017,~~ we ~~paid $15,195 in dividends and distributions, redeemed $1,530 of shares and units, received proceeds from new mortgage notes payable of $23,916, and made mortgage principal payments of $16,632.~~2021. For the nine months ended September 30, ~~2016,~~2021, we paid ~~$13,126~~$17,309 in dividends and distributions, redeemed ~~$1,765~~$4,465 of shares and units, received ~~proceeds~~$71,530 from new mortgage notes payable, ~~of $20,271,~~ and made mortgage principal payments of ~~$9,857.~~$30,360.

~~Table of Contents~~

Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, ~~2017~~2022 to September 30, ~~2017~~2022 totaling ~~$6,111~~$9,114 or ~~$0.7425~~$0.8625 per share, ~~including amounts~~of which $3,353 were cash dividends and $5,760 were reinvested through ~~the dividend reinvestment plan. During the nine months ended September 30, 2017, we paid cash dividends of $2,201 and dividends of $3,910 were reinvested under~~ the dividend reinvestment plan. The cash dividends were paid with the ~~$27,718~~$28,757 from our cash flows from ~~operations and $743 provided by distributions from unconsolidated affiliates.~~operations.

We declared cash dividends to our shareholders during the period from January 1, ~~2016~~2021 to September 30, ~~2016~~2021 totaling ~~$5,606~~$8,020 or ~~$0.7200~~$0.7950 per share, ~~including amounts~~of which $2,818 were cash dividends and $5,202 were reinvested through ~~the dividend reinvestment plan. During the nine months ended September 30, 2016, we paid cash dividends of $1,983 and dividends of $3,623 were reinvested under~~ the dividend reinvestment plan. The cash dividends were paid with the ~~$26,799~~$32,840 from our cash flows from ~~operations and $325 provided by distributions from unconsolidated affiliates.~~operations.

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

Table of Contents

The following table presents certain information regarding our dividend coverage:

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
Gain (Loss) on sales of real estate and non-real estate investments

2,047

(320)
Dividends declared

(6,111)

(5,606)
Excess

$
24,397

$
21,198


	Nine months ended
	September 30,
	2022		2021

	(in thousands)
Cash flows provided by operations (includes net income of $20,812 and $19,832, respectively)	$	28,757	$	32,840
Distributions in excess of earnings received from unconsolidated affiliates		408		—
Gain on sales of real estate and non-real estate investments		9,897		1,710
Dividends declared		(9,114)		(8,020)
Excess	$	29,948	$	26,530

Limited Partnership Units

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

For the nine months ended September 30, ~~2017,~~2022, we declared ~~quarterly~~ distributions ~~totalling $12,909~~totaling $16,097 to holders of limited partnership units in our ~~operating partnership,~~Operating Partnership, which we paid on April ~~17,~~15; July ~~17,~~15; and October ~~16, 2017.~~17, 2022. Distributions were paid at a rate of ~~$0.2475~~$0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the nine months ended September 30, ~~2016,~~2021, we declared quarterly distributions ~~totalling $11,546~~totaling $14,493 to holders of limited partnership units in our ~~operating partnership,~~Operating Partnership, which we paid on April ~~15,~~15; July ~~15,~~15; and October ~~17, 2016.~~15, 2021. Distributions were paid at a rate of ~~$0.2400~~$0.2650 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

~~Table of Contents~~

Sources of Dividends and Distributions

For the nine months ended September 30, ~~2017,~~2022, we paid aggregate dividends of ~~$6,111,~~$8,784, which were paid with cash flows provided by operating ~~activities and distributions from unconsolidated affiliates.~~activities. Our funds from operations, or FFO, was ~~$27,165 while our modified funds from operations, or MFFO, for the nine months ended September 30, 2017 was $28,540; therefore~~$31,309 Therefore, our management believes our distribution policy is sustainable over time. For the nine months ended September 30, ~~2016,~~2021, we paid aggregate dividends of ~~$5,606~~$7,922 which were paid with cash flows provided by operating ~~activities and distributions from unconsolidated affiliates.~~activities. Our FFO was ~~$26,487 while our MFFO,~~$35,404 as of the nine months ended September 30, ~~2016 was $28,013.~~2021. 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, our cash resources consisted of cash and cash equivalents totaling approximately $20,991. 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, which could potentially be used as collateral to secure additional financing in future periods.

At September 30, 2017, there was no balance outstanding on the lines of credit, leaving $37,015 available and unused under the agreements. See Note 7 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.

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

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

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

~~Off-Balance Sheet Arrangements~~

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

~~Inflation~~

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

As of September 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

~~Table of Contents~~

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

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

The Trust is exposed to certain risk arising from both its business operations and economic conditions and principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Trust manages economic risks, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities. The principal material financial market risk to which we are exposed, is interest-rate risk, which the Trust manages through the use of derivative financial instruments. Specifically, the Trust enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. During the the nine months ended September 30, 2022, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. ~~Our~~These swaps have an aggregated notional amount of $106,718 at September 30, 2022. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.

As of September 30, 2022, the Trust had $106,718 of variable-rate borrowings, with the total outstanding balance fixed through interest rate swaps. Even though our goal is to maintain a fairly low exposure to ~~market~~interest rate risk, ~~for changes~~we may become vulnerable to significant fluctuations in interest rates ~~relates primarily to~~on any future repricing or refinancing ~~long-term~~of our fixed ~~rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our~~or variable rate ~~lines~~debt or future debt.

Table of ~~credit.~~Contents

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

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

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief ~~Accounting~~Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief ~~Accounting~~Financial Officer have concluded that, as of September 30, ~~2017,~~2022, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the third fiscal quarter of ~~2017~~ 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

5043

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we may be involved in disputes or litigation relating to claims arising out of our operations. We are not currently a party to any legal proceedings that could reasonably be expected to have a material adverse effect on our business, financial condition, results of operation, or cash flows.

Item 1A. Risk Factors.

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the period ended December 31, 2021.

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

Sale of Securities

Neither Sterling nor the ~~operating partnership~~Operating Partnership issued any unregistered securities during the three months ended September 30, ~~2017.~~2022.

Other Sales

During the three months ended September 30, ~~2017, there were no~~2022, we did not issue any common shares in exchange for limited partnership units of the ~~operating partnership~~Operating Partnership on a one-for-one basis pursuant to redemption requests made by accredited investors ~~pursuant to~~under Section ~~4(2)~~4 (a) (2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D.D promulgated thereunder.

Redemptions of Securities

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

Average

Total Number of

Total Number of

Approximate Dollar Value of

Total Number

Total Number

Price

Shares Redeemed

Units Redeemed

Shares (or Units) that May

of Common

of Limited

Paid per

as Part of

as Part of

Yet Be Redeemed Under

Shares

Partner Units

Common

Publicly Announced

Publicly Announced

Publicly Announced
Period

Redeemed


Redeemed

Share/Unit

Plans or Programs

Plans or Programs

Plans or Programs
July 1-31, 2017

3,000

13,000

$
15.50

1,072,000

676,000

$
6,352
August 1-31, 2017

5,000

—

$
15.50

1,077,000

676,000

$
6,274
September 1-30, 2017

2,000

4,000

$
15.50

1,079,000

680,000

$
6,181
Total

10,000

17,000

2022:


			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
July 1-31, 2022	2,000	13,000	$	21.85	1,488,000	1,147,000	$	14,999
August 1-31, 2022	7,000	—	$	21.85	1,495,000	1,147,000	$	14,899
September 1-30, 2022	5,000	—	$	21.85	1,500,000	1,147,000	$	14,899
Total	14,000	13,000

For the three months ended September 30, ~~2017,~~2022, we redeemed all shares or units for which we received redemption requests. In addition, for the three months ended September 30, ~~2017,~~2022, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan, effective January 1, 2022, permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our ~~operating partnership,~~Operating Partnership, up to ~~a maximum~~an aggregate amount of ~~$30,000~~$55,000 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 September 30, 2022, was $14,899. The redemption price for such shares and units redeemed under the plan was fixed at ~~$15.00~~$21.85 per share or unit, which ~~was increased to $15.50~~became effective ~~March 29, 2017 and is the current redemption price.~~January 1, 2022. 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.

5144

Table of Contents

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Table of Contents

Item 6. Exhibits.

~~Item 6. Exhibits.~~

Exhibit
Number		Title of Document
3.1		Articles of Organization of Sterling Real Estate Trust filed December 3, 2002

3.2		Amendment to Articles of Organization of Sterling Real Estate Trust dated August 1, 2014

3.3		Amended and Restated Bylaws dated June 2, 2020

4.1		Declaration of Trust Sterling Real Estate Trust dated July 21, 2004

4.2		Addendum to Declaration of Trust dated July 25, 2007

4.3		Sterling Third Amended and Restated Declaration of Trust dated March 27, 2014

4.4		Sterling Third Amended and Restated Declaration of Trust dated June 23, 2016

4.5		First Amended and Restated Declaration of Trust dated February 9, 2011

4.6		Amendment No. 1 to First Amended and Restated Declaration of Trust dated August 1, 2014

4.7		Amended and Restated Share Redemption Plan effective January 1, 2021

31.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

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

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

5246

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SIGNATURES

~~SIGNATURES~~

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

Dated:November ~~8, 2017~~9, 2022

	STERLING REAL ESTATE TRUST

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

	By:	/s/ ~~Angie D. Stock~~Damon K. Gleave
		~~Angie D. Stock~~Damon K. Gleave
		Chief ~~Accounting~~Financial Officer
		(Principal Financial ~~and Accounting~~ Officer)

5347

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

~~1711 Gold Drive South,~~4340 18th Ave S., Suite ~~100,~~ 200, Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)


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


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


Class		Outstanding at November ~~6, 2017~~7, 2022
Common Shares of Beneficial Interest, $0.01 par value per share		~~8,516,368~~10,811,038

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of September 30, ~~2017~~2022 and December 31, ~~2016~~ 2021	3
Consolidated Statements of Operations and Other Comprehensive Income – Three and nine months ended September 30, ~~2017~~2022 and ~~2016~~ 2021	4
Consolidated ~~Statement~~Statements of Shareholders’ Equity – ~~Nine~~Three and nine months ended September 30, ~~2017~~2022 and 2021	5
Consolidated Statements of Cash Flows – ~~Nine~~nine months ended September 30, ~~2017~~2022 and ~~2016~~ 2021	6 7
Notes to Consolidated Financial Statements	8 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50 42
Item 4. Controls and Procedures	50 43

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51 44
Item 6. Exhibits	52 46
Signatures	53 47


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

Total Assets	$	700,782	$	670,513

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

COMMITMENTS and CONTINGENCIES - Note 16

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

	$	700,782	$	670,513


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

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(in thousands, except per share data)				(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	34,531	$	33,053	$	101,264	$	96,736
Expenses
Expenses from rental operations
Operating expenses		14,363		14,184		42,209		37,956
Real estate taxes		3,565		3,489		10,700		10,123
Depreciation and amortization		6,120		5,551		17,865		16,634
Interest		5,081		4,671		14,882		13,261
		29,129		27,895		85,656		77,974
Administration of REIT		1,471		1,007		4,087		3,267
Total expenses		30,600		28,902		89,743		81,241
Income from operations		3,931		4,151		11,521		15,495

Other income
Equity in losses of unconsolidated affiliates		(499)		(67)		(1,923)		(183)
Other income		271		1,085		714		1,574
Gain on sale or conversion of real estate investments		6,557		—		9,897		1,710
Gain on involuntary conversion		56		549		603		1,236
Total other income		6,385		1,567		9,291		4,337
Net income	$	10,316	$	5,718	$	20,812	$	19,832
Net income attributable to noncontrolling interest:
Operating partnership		6,601		3,753		13,277		12,861
Partially owned properties		(53)		(139)		(15)		(148)
Net income attributable to Sterling Real Estate Trust	$	3,768	$	2,104	$	7,550	$	7,119

Net income attributable to Sterling Real Estate Trust per common share, basic and diluted	$	0.35	$	0.21	$	0.71	$	0.71

Comprehensive income:
Net income	$	10,316	$	5,718	$	20,812	$	19,832
Other comprehensive gain (loss) - change in fair value of interest rate swaps		4,967		(66)		15,306		1,473
Comprehensive income		15,283		5,652		36,118		21,305
Comprehensive income attributable to noncontrolling interest		9,707		3,571		23,021		13,661
Comprehensive income attributable to Sterling Real Estate Trust	$	5,576	$	2,081	$	13,097	$	7,644

Weighted average Common Shares outstanding, basic and diluted		10,685		10,215		10,572		10,095


			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, 2021	10,342	$ 148,562	($ 31,706)	$ 116,856	$ 176,954	$ 2,657	($ 950)	$ 295,517
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-	-	-	-	10,180	-	-	10,180
Shares/units redeemed	(18)	(401)	-	(401)	(335)	-	-	(736)
Dividends and distributions declared	-	-	(3,007)	(3,007)	(5,359)	-	-	(8,366)
Dividends reinvested - stock dividend	79	1,716	-	1,716	-	-	-	1,716
Issuance of shares under optional purchase plan	57	1,313	-	1,313	-	-	-	1,313
Change in fair value of interest rate swaps	-	-	-	-	-	-	6,524	6,524
Net income	-	-	1,214	1,214	2,145	30	-	3,389
BALANCE AT MARCH 31, 2022	10,460	$ 151,190	($ 33,499)	$ 117,691	$ 183,585	$ 2,687	$ 5,574	$ 309,537
Shares/units redeemed	(18)	(386)	-	(386)	(138)	-	-	(524)
Dividends and distributions declared	-	-	(3,037)	(3,037)	(5,357)	-	-	(8,394)
Dividends reinvested - stock dividend	86	1,877	-	1,877	-	-	-	1,877
Issuance of shares under optional purchase plan	35	806	-	806	-	-	-	806
Change in fair value of interest rate swaps	-	-	-	-	-	-	3,815	3,815
Net income	-	-	2,568	2,568	4,531	8	-	7,107
BALANCE AT JUNE 30, 2022	10,563	$ 153,487	($ 33,968)	$ 119,519	$ 182,621	$ 2,695	$ 9,389	$ 314,224
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-	-	-	-	2,210	-	-	2,210
Shares issued under trustee compensation plan	3	65	-	65	-	-	-	65
Shares/units redeemed	(14)	(310)	-	(310)	(293)	-	-	(603)
Dividends and distributions declared	-	-	(3,070)	(3,070)	(5,381)	-	-	(8,451)
Dividends reinvested - stock dividend	87	1,910	-	1,910	-	-	-	1,910
Issuance of shares under optional purchase plan	41	939	-	939	-	-	-	939
Change in fair value of interest rate swaps	-	-	-	-	-	-	4,967	4,967
Net income	-	-	3,768	3,768	6,601	(53)	-	10,316
BALANCE AT SEPTEMBER 30, 2022	10,680	$ 156,091	($ 33,270)	$ 122,821	$ 185,758	$ 2,642	$ 14,356	$ 325,577


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

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


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

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


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


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


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


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


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


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


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


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


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

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


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