Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 20172022

Or

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from ------------to------------


Commission File Number:000-54295

Sterling Real Estate Trust

d/b/a Sterling Multifamily Trust

(Exact name of registrant as specified in its charter)

North Dakota

90-0115411

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1711 Gold Drive South,4340 18th Ave S., Suite 100, 200, Fargo, North Dakota

58103

(Address of principal executive offices)

(Zip Code)

(701) (701) 353-2720

(Registrant’s telephone number, including area code)

(Former name, former address and formal fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Common Shares, par value $0.01 per share

N/A

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at November 6, 20177, 2022

Common Shares of Beneficial Interest,
$0.01 par value per share

8,516,36810,811,038


Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

INDEX

Page

No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):

3

Consolidated Balance Sheets – as of September 30, 20172022 and December 31, 2016 2021

3

Consolidated Statements of Operations and Other Comprehensive Income – Three and nine months ended September 30, 20172022 and 2016 2021

4

Consolidated StatementStatements of Shareholders’ Equity – NineThree and nine months ended September 30, 20172022 and 2021

5

Consolidated Statements of Cash Flows – Ninenine months ended September 30, 20172022 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


Table of Contents

PART I – FINANCIAL INFORMATION

Item

Item 1. Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

as of September 30, 20172022 (UNAUDITED) and December 31, 20162021

September 30,

December 31,

    

2022

    

2021

(in thousands)

ASSETS

Real estate investments

Land and land improvements

$

125,408

$

125,338

Building and improvements

789,974

763,003

Construction in progress

6,277

8,361

Real estate investments

921,659

896,702

Less accumulated depreciation

(191,016)

(179,155)

Real estate investments, net

730,643

717,547

Cash and cash equivalents

20,464

51,507

Restricted deposits

9,267

9,149

Investment in securities

42,062

Investment in unconsolidated affiliates

26,176

18,658

Notes receivable

7,749

7,457

Lease intangible assets, less accumulated amortization

5,556

6,246

Other assets, net

25,868

10,302

Total Assets

$

867,785

$

820,866

LIABILITIES

Mortgage notes payable, net

$

511,990

$

493,142

Dividends payable

8,451

7,567

Tenant security deposits payable

6,305

5,225

Lease intangible liabilities, less accumulated amortization

684

811

Accrued expenses and other liabilities

14,778

18,604

Total Liabilities

542,208

525,349

COMMITMENTS and CONTINGENCIES - Note 13

SHAREHOLDERS' EQUITY

Beneficial interest

122,821

116,856

Noncontrolling interest

Operating partnership

185,758

176,954

Partially owned properties

2,642

2,657

Accumulated other comprehensive income (loss)

14,356

(950)

Total Shareholders' Equity

325,577

295,517

$

867,785

$

820,866

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

Real estate investments

 

$

648,856

 

$

622,975

Cash and cash equivalents

 

 

20,991

 

 

12,034

Restricted deposits and funded reserves

 

 

7,894

 

 

7,213

Investment in unconsolidated affiliates

 

 

2,785

 

 

3,653

Due from related party

 

 

 2

 

 

34

Receivables

 

 

4,748

 

 

4,258

Prepaid expenses

 

 

862

 

 

433

Notes receivable

 

 

 —

 

 

600

Financing and lease costs, less accumulated amortization of $1,875 in 2017 and $1,720 in 2016

 

 

776

 

 

950

Assets held for sale

 

 

 —

 

 

2,482

Lease intangible assets, less accumulated amortization of $12,491 in 2017 and $10,770 in 2016

 

 

13,863

 

 

15,852

Other assets

 

 

 5

 

 

29

 

 

 

 

 

 

 

Total Assets

 

$

700,782

 

$

670,513

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Mortgage notes payable, net

 

$

402,465

 

$

390,479

Special assessments payable

 

 

1,214

 

 

480

Dividends payable

 

 

6,404

 

 

5,925

Due to related party

 

 

617

 

 

957

Tenant security deposits payable

 

 

4,049

 

 

3,851

Subordinated debt

 

 

175

 

 

175

Lease intangible liabilities, less accumulated amortization of $1,324 in 2017 and $1,122 in 2016

 

 

1,846

 

 

2,075

Accounts payable - trade

 

 

474

 

 

438

Retainage payable

 

 

420

 

 

288

Liabilities related to assets held for sale

 

 

 —

 

 

125

Fair value of interest rate swaps

 

 

88

 

 

145

Deferred insurance proceeds

 

 

1,475

 

 

102

Accrued expenses and other liabilities

 

 

8,672

 

 

6,818

Total Liabilities

 

 

427,899

 

 

411,858

 

 

 

 

 

 

 

COMMITMENTS and CONTINGENCIES - Note 16

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Beneficial interest

 

 

89,023

 

 

84,727

Noncontrolling interest

 

 

 

 

 

 

Operating partnership

 

 

180,725

 

 

170,138

Partially owned properties

 

 

3,223

 

 

3,935

Accumulated other comprehensive loss

 

 

(88)

 

 

(145)

Total Shareholders' Equity

 

 

272,883

 

 

258,655

 

 

 

 

 

 

 

 

 

$

700,782

 

$

670,513

See Notes to Consolidated Financial Statements

3


Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED September 30, 20172022 and 20162021 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

    

2016

    

2017

    

2016

 

(in thousands, except per share data)

 

(in thousands, except per share data)

Income from rental operations

 

 

 

Real estate rental income

$

27,088

 

$

25,365

 

$

80,606

 

$

76,075

Tenant reimbursements

 

1,567

 

 

1,523

 

 

4,592

 

 

4,547

 

 

28,655

 

 

26,888

 

 

85,198

 

 

80,622

Expenses

 

 

 

 

 

 

 

 

 

 

 

Expenses from rental operations

 

 

 

 

 

 

 

 

 

 

 

Interest

 

4,690

 

 

4,636

 

 

13,938

 

 

13,740

Depreciation and amortization

 

5,427

 

 

5,471

 

 

16,170

 

 

16,711

Real estate taxes

 

3,186

 

 

2,360

 

 

8,389

 

 

7,020

Property management fees

 

3,137

 

 

2,771

 

 

9,163

 

 

8,095

Utilities

 

1,918

 

 

1,709

 

 

6,463

 

 

5,715

Repairs and maintenance

 

6,170

 

 

6,288

 

 

16,103

 

 

15,703

Insurance

 

376

 

 

339

 

 

1,112

 

 

1,022

Loss on lease terminations

 

 —

 

 

25

 

 

146

 

 

299

 

 

24,904

 

 

23,599

 

 

71,484

 

 

68,305

Administration of REIT

 

 

 

 

 

 

 

 

 

 

 

Administrative expenses

 

61

 

 

71

 

 

290

 

 

301

Advisory fees

 

714

 

 

669

 

 

2,114

 

 

1,971

Acquisition and disposition expenses

 

 —

 

 

299

 

 

1,375

 

 

1,526

Trustee fees

 

12

 

 

14

 

 

44

 

 

46

Legal and accounting

 

98

 

 

83

 

 

385

 

 

343

 

 

885

 

 

1,136

 

 

4,208

 

 

4,187

Total expenses

 

25,789

 

 

24,735

 

 

75,692

 

 

72,492

Income from operations

 

2,866

 

 

2,153

 

 

9,506

 

 

8,130

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Equity in income of unconsolidated affiliates

 

373

 

 

298

 

 

743

 

 

820

Other income

 

20

 

 

24

 

 

73

 

 

62

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

 

(3)

 

 

 —

 

 

2,049

 

 

(320)

Gain on change in control of real estate investments

 

 —

 

 

 —

 

 

2,186

 

 

 —

Gain (Loss) on involuntary conversion

 

 —

 

 

48

 

 

189

 

 

(89)

 

 

390

 

 

370

 

 

5,240

 

 

473

Net income

$

3,256

 

$

2,523

 

$

14,746

 

$

8,603

Net income (loss) attributable to noncontrolling interest:

 

 

 

 

 

 

 

 

 

 

 

Operating Partnership

 

2,264

 

 

1,814

 

 

10,147

 

 

6,109

Partially owned properties

 

(90)

 

 

(176)

 

 

(222)

 

 

(502)

Net income attributable to Sterling Real Estate Trust

$

1,082

 

$

885

 

$

4,821

 

$

2,996

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share, basic and diluted

$

0.13

 

$

0.11

 

$

0.59

 

$

0.38

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

3,256

 

$

2,523

 

$

14,746

 

$

8,603

Other comprehensive gain (loss) - change in fair value of interest rate swaps

 

17

 

 

33

 

 

57

 

 

28

Comprehensive income

 

3,273

 

 

2,556

 

 

14,803

 

 

8,631

Comprehensive income attributable to noncontrolling interest

 

2,185

 

 

1,661

 

 

9,964

 

 

5,626

Comprehensive income attributable to Sterling Real Estate Trust

$

1,088

 

$

895

 

$

4,839

 

$

3,005

Three Months Ended

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

See Notes to Consolidated Financial Statements

4


Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED September 30, 2017 2022 (UNAUDITED)

Accumulated

Noncontrolling

Distributions

Total

Interest

Accumulated

Common

Paid-in

in Excess of

Beneficial

Operating

Partially Owned

Comprehensive

Shares

Capital

Earnings

Interest

Partnership

Properties

Income (Loss)

Total

(in thousands)

BALANCE AT DECEMBER 31, 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

See Notes to Consolidated Financial Statements

5


Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY (Continued)

FOR THE THREE AND NINE MONTHS ENDED SeptemberSEPTEMBER 30, 2017 and 20162021(UNAUDITED)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

    

2017

    

2016

 

 

(in thousands)

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

14,746

 

$

8,603

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

(Gain) loss on sale of real estate investments

 

 

(2,072)

 

 

316

Loss on sale of non-real estate investments

 

 

23

 

 

 4

(Gain) loss on involuntary conversion

 

 

(189)

 

 

89

(Gain) on change in control of real estate investment

 

 

(2,186)

 

 

 —

Loss on lease terminations

 

 

146

 

 

299

Equity in income of unconsolidated affiliates

 

 

(743)

 

 

(820)

Distributions of earnings of unconsolidated affiliates

 

 

80

 

 

816

Depreciation

 

 

14,270

 

 

13,882

Amortization

 

 

1,855

 

 

2,751

Amortization of debt issuance costs

 

 

561

 

 

517

Effects on operating cash flows due to changes in

 

 

 

 

 

 

Restricted deposits - tenant security deposits

 

 

(150)

 

 

(85)

Restricted deposits - real estate tax and insurance escrows

 

 

577

 

 

20

Due from related party

 

 

32

 

 

60

Receivables

 

 

(81)

 

 

(286)

Prepaid expenses

 

 

(430)

 

 

66

Other assets

 

 

24

 

 

135

Due to related party

 

 

(532)

 

 

(8)

Tenant security deposits payable

 

 

176

 

 

67

Accounts payable - trade

 

 

(96)

 

 

(561)

Accrued expenses and other liabilities

 

 

1,707

 

 

934

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

27,718

 

 

26,799

INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of real estate investment properties

 

 

(3,718)

 

 

(7,352)

Capital expenditures and tenant improvements

 

 

(9,122)

 

 

(7,518)

Proceeds from sale of real estate investments

 

 

4,442

 

 

1,404

Restricted deposits - exchange escrow

 

 

(4,328)

 

 

 —

Proceeds from involuntary conversion

 

 

1,937

 

 

915

Investment in unconsolidated affiliates

 

 

(294)

 

 

(67)

Distributions in excess of earnings received from unconsolidated affiliates

 

 

743

 

 

325

Restricted deposits - replacement reserve escrows

 

 

(952)

 

 

(819)

Notes receivable issued

 

 

 —

 

 

(24)

Notes receivable payments received

 

 

642

 

 

 7

NET CASH USED IN INVESTING ACTIVITIES

 

 

(10,650)

 

 

(13,129)

FINANCING ACTIVITIES

 

 

 

 

 

 

Payments for financing, debt issuance and lease costs

 

 

(442)

 

 

(431)

Principal payments on special assessments payable

 

 

(420)

 

 

(657)

Proceeds from issuance of mortgage notes payable and subordinated debt

 

 

23,916

 

 

20,271

Principal payments on mortgage notes payable

 

 

(16,632)

 

 

(9,857)

Advances on lines of credit

 

 

 —

 

 

6,669

Payments on lines of credit

 

 

 —

 

 

(6,669)

Proceeds from issuance of shares under optional purchase plan

 

 

2,192

 

 

1,599

Shares/units redeemed

 

 

(1,530)

 

 

(1,765)

Dividends/distributions paid

 

 

(15,195)

 

 

(13,126)

NET CASH USED IN FINANCING ACTIVITIES

 

 

(8,111)

 

 

(3,966)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

8,957

 

 

9,704

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

12,034

 

 

6,461

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

20,991

 

$

16,165

Accumulated

Noncontrolling

Distributions

Total

Interest

Accumulated

Common

Paid-in

in Excess of

Beneficial

Operating

Partially Owned

Comprehensive

Shares

Capital

Earnings

Interest

Partnership

Properties

Income (Loss)

Total

(in thousands)

BALANCE AT DECEMBER 31, 2020

9,855

$ 139,105

($ 29,739)

$ 109,366

$ 181,621

$ 2,346

($ 1,805)

$ 291,528

Shares/units redeemed

(41)

(777)

-

(777)

(628)

-

-

(1,405)

Dividends and distributions declared

-

(2,642)

(2,642)

(4,835)

-

-

(7,477)

Dividends reinvested - stock dividend

89

1,686

-

1,686

-

-

-

1,686

Issuance of shares under optional purchase plan

65

1,307

-

1,307

-

-

-

1,307

Change in fair value of interest rate swaps

-

-

-

-

-

2,384

2,384

Net income (loss)

-

2,052

2,052

3,753

31

-

5,836

BALANCE AT MARCH 31, 2021

9,968

$ 141,321

($ 30,329)

$ 110,992

$ 179,911

$ 2,377

$ 579

$ 293,859

Contribution of assets in exchange for the issuance of noncontrolling interest shares

-

-

-

-

890

-

-

890

Shares/units redeemed

(15)

(292)

-

(292)

(1,853)

-

-

(2,145)

Dividends and distributions declared

-

-

(2,672)

(2,672)

(4,821)

-

-

(7,493)

Dividends reinvested - stock dividend

88

1,679

-

1,679

-

-

-

1,679

Issuance of shares under optional purchase plan

41

820

-

820

-

-

-

820

Change in fair value of interest rate swaps

-

-

-

-

-

-

(845)

(845)

Net income

-

-

2,963

2,963

5,355

(40)

-

8,278

BALANCE AT JUNE 30, 2021

10,082

$ 143,528

($ 30,038)

$ 113,490

$ 179,482

$ 2,337

($ 266)

$ 295,043

Contribution of assets in exchange for the issuance of noncontrolling interest shares

-

-

-

-

1,993

-

-

1,993

Shares issued under trustee compensation plan

3

57

-

57

-

-

-

57

Shares/units redeemed

(6)

(105)

-

(105)

(810)

-

-

(915)

Dividends and distributions declared

-

-

(2,707)

(2,707)

(4,836)

-

-

(7,543)

Dividends reinvested - stock dividend

92

1,743

-

1,743

-

-

-

1,743

Issuance of shares under optional purchase plan

44

886

-

886

-

-

-

886

Change in fair value of interest rate swaps

-

-

-

-

-

-

(66)

(66)

Net income (loss)

-

-

2,104

2,104

3,753

(139)

-

5,718

BALANCE AT SEPTEMBER 30, 2021

10,215

$ 146,109

($ 30,641)

$ 115,468

$ 179,582

$ 2,198

($ 332)

$ 296,916

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS

FOR THE NINE MONTHS ENDED September 30, 20172022 and 20162021 (UNAUDITED) (Continued)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

    

2017

    

2016

 

 

(in thousands)

SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

 

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

 

$

13,954

 

$

13,776

 

 

 

 

 

 

 

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Dividends reinvested

 

$

3,836

 

$

3,543

Dividends declared and not paid

 

 

2,067

 

 

1,893

UPREIT distributions declared and not paid

 

 

4,336

 

 

3,912

UPREIT units converted to REIT common shares

 

 

133

 

 

435

Stock issued pursuant to trustee compensation plan

 

 

59

 

 

60

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

 

 

14,378

 

 

16,940

Increase in land improvements due to increase in special assessments payable

 

 

1,141

 

 

772

Unrealized gain on interest rate swaps

 

 

57

 

 

28

Acquisition of assets with new financing

 

 

3,264

 

 

2,662

Acquisition of assets through assumption of debt and liabilities

 

 

1,367

 

 

78

Capitalized interest and real estate taxes related to construction in progress

 

 

126

 

 

66

Acquisition of assets with accounts payable

 

 

572

 

 

413

Acquisition of assets with 1031 exchange funds

 

 

4,278

 

 

 —

Nine Months Ended

September 30,

    

2022

    

2021

(in thousands)

OPERATING ACTIVITIES

Net income

$

20,812

$

19,832

Adjustments to reconcile net income to net cash provided by operating activities

Gain on sale of real estate investments

(9,897)

(1,710)

Gain on involuntary conversion

(603)

(1,236)

Change in fair value of securities

(62)

Equity in loss of unconsolidated affiliates

1,923

183

Distributions of earnings of unconsolidated affiliates

219

174

Allowance for uncollectible accounts receivable

(164)

502

Depreciation

16,445

15,665

Amortization

1,420

971

Amortization of debt issuance costs

506

402

Effects on operating cash flows due to changes in

Other assets

(1,426)

(1,160)

Tenant security deposits payable

1,080

298

Accrued expenses and other liabilities

(1,496)

(1,081)

NET CASH PROVIDED BY OPERATING ACTIVITIES

28,757

32,840

INVESTING ACTIVITIES

Purchase of securities

(42,000)

-

Purchase of real estate investment properties

(26,365)

(35,893)

Capital expenditures and tenant improvements

(8,251)

(13,629)

Proceeds from sale of real estate investments and non-real estate investments

22,441

5,590

Proceeds from involuntary conversion

1,049

4,095

Investment in unconsolidated affiliates

(10,068)

(5,845)

Distributions in excess of earnings received from unconsolidated affiliates

408

Notes receivable issued net of payments received

(292)

(3,430)

NET CASH USED IN INVESTING ACTIVITIES

(63,078)

(49,112)

FINANCING ACTIVITIES

Payments for financing, debt issuance

(305)

(700)

Payments on investment certificates and subordinated debt

(25)

Proceeds from issuance of mortgage notes payable and subordinated debt

37,569

71,530

Principal payments on mortgage notes payable

(16,239)

(30,360)

Proceeds from issuance of shares under optional purchase plan

3,058

3,013

Shares/units redeemed

(1,863)

(4,465)

Dividends/distributions paid

(18,824)

(17,309)

NET CASH PROVIDED BY FINANCING ACTIVITIES

3,396

21,684

NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS

(30,925)

5,412

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD

60,656

27,635

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

$

29,731

$

33,047

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

Cash and cash equivalents

$

20,464

$

22,168

Restricted deposits

9,267

10,879

TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD

$

29,731

$

33,047

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE NINE MONTHS ENDED September 30, 2022 and 2021 (UNAUDITED)

Nine Months Ended

September 30,

    

2022

    

2021

(in thousands)

SCHEDULE OF CASH FLOW INFORMATION

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

$

14,412

$

12,812

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Dividends reinvested

$

5,503

$

5,108

Dividends declared and not paid

3,070

2,707

UPREIT distributions declared and not paid

5,381

4,836

Shares issued pursuant to trustee compensation plan

65

57

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

12,390

2,883

Increase in land improvements due to increase in special assessments payable

217

204

Unrealized gain on interest rate swaps

15,306

1,473

Acquisition of assets through assumption of debt and liabilities

38,755

569

Capitalized interest and real estate taxes related to construction in progress

68

200

See Notes to Consolidated Financial Statements

8

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (UNAUDITED)

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

Note 1 - Organization

Sterling Real Estate Trust d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in NovemberDecember 2002.  Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.Code.  

Sterling previously established an operating partnershipOperating Partnership (“Sterling Properties, LLLP” or the “Operating Partnership”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner of Sterling Properties, LLLP, Sterling has management responsibility for all activities of the operating partnership.Operating Partnership. As of September 30, 20172022 and December 31, 2016,2021, Sterling owned approximately 32.28%36.33% and 32.41%36.22%, respectively, of the operating partnership.Operating Partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016,2021, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2017 and consolidated statements of operations and other comprehensive income, consolidated statement of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 2017 and 2016, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and nine months ended September 30, 2017.2022. These adjustments are of a normal recurring nature.

Principles of Consolidation

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

As of September 30, 2022 the Trust owned approximately 36.33% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the partnership agreement, these persons have the right to tender their OP Units for redemption to the Operating Partnership at any time following a specified restricted period for cash equal to the fair value of an equivalent number of common shares of the Trust. In lieu of delivering cash, however, the Trust, as the Operating Partnership’s general partner, may, at its option, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Trust so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Trust’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Trust issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Trust an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

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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)

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

In instances where the Trust determines that it is not the primary beneficiary of a VIE and the Trust does not control the joint venture but can exercise influence over the entity with respect to its operations and major decisions, the Trust will use the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Trust’s operations but instead its share of operations will be reflected as equity in earnings (losses) of unconsolidated affiliates on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated entity on the consolidated balance sheets. See Note 5 for additional details regarding variable interest entities where the Trust uses the equity method of investing.

8


TableThe Operating Partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s sole significant asset is its investment in the Operating Partnership. As a result, substantially all of Contentsthe Trust’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Trust’s debt is an obligation of the Operating Partnership, and the Trust guarantees the unsecured debt obligations of the Operating Partnership.

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

Principal Business Activity

Sterling currently owns directly and indirectly 164 properties.  The Trust’s 115 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings.  The Trust owns 49 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties.  Presently,may also acquire property using a reverse like-kind exchange structure (a “Reverse 1031  Like-Kind Exchange”) under Section 1031 of the Trust’s mixInternal Revenue Code of properties is 71.0% residential and 29.0% commercial (based1986, as amended, to defer taxable gains on cost) and total $648,856 inthe subsequent sale of real estate investments at September 30, 2017. Effective January 1, 2016,property. As such, the acquired property (the “Parked Property”) is in the possession of a qualified intermediary engaged to execute the Reverse 1031 Like-Kind Exchange until the subsequent sale transaction and the Reverse 1031 Like-Kind Exchange are completed. Sterling retains essentially all of the legal and economic benefits and obligations related to the Parked Property prior to the completion of the Reverse 1031 Like-Kind Exchange. As such, a Parked Property is included in Sterling’s acquisition strategy and focusconsolidated financial statements as a consolidated VIE until legal title is solely on multifamily apartment properties.  We currently have no planstransferred to the Operating Partnership upon completion of the Reverse 1031 Like-Kind Exchange. Sterling may also dispose of our existing commercial properties.property under Section 1033 (an involuntary conversion) in which case taxable gains are also deferred.

 

 

 

 

 

 

 

Residential Property

    

Location

    

No. of Properties

    

Units

 

 

North Dakota

 

96

 

5,828

 

 

Minnesota

 

16

 

3,027

 

 

Missouri

 

1

 

164

 

 

Nebraska

 

2

 

316

 

 

 

 

115

 

9,335

 

 

 

 

 

 

 

Commercial Property

    

Location

    

No. of Properties

    

Sq. Ft

 

 

North Dakota

 

20

 

805,000

 

 

Arkansas

 

2

 

29,000

 

 

Colorado

 

1

 

13,000

 

 

Iowa

 

1

 

33,000

 

 

Louisiana

 

1

 

15,000

 

 

Michigan

 

1

 

12,000

 

 

Minnesota

 

15

 

683,000

 

 

Mississippi

 

1

 

15,000

 

 

Nebraska

 

1

 

16,000

 

 

Texas

 

1

 

7,000

 

 

Wisconsin

 

5

 

63,000

 

 

 

 

49

 

1,691,000

Concentration of Credit Risk

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

Use of Estimates

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

10

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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)

Real Estate Investments

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

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

accompanying consolidated statements of operations and other comprehensive income.

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

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

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

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

the three months ended September 30, 2017 and 2016, respectively, was recorded as an increase to income from rental operations.  Amortization pertaining to above market lease intangibles of $169 and $174 for the nine months ended September 30, 2017 and 2016, respectively, was recorded as a reduction to income from rental operations. Amortization pertaining to below market lease intangibles of $214 and $253 for the nine months ended September 30, 2017 and 2016, respectively, was recorded as an increase to income from rental operations.

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

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:

Buildings and improvements

40 years

Furniture, fixtures and equipment

 

5-95-9 years

Depreciation expense for the three months ended September 30, 2017 and 2016 totaled $4,816 and $4,625, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 totaled $14,270 and $13,882, respectively.

The Company’sTrust’s investment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the CompanyTrust separately determines whether impairment indicators exist for each property.

Examples of situations considered to be impairment indicators include, but are not limited to:

·

a substantial decline or continued low occupancy rate;

·

continued difficulty in leasing space;

·

significant financially troubled tenants;

·

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

·

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

·

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

If the presence of one or more impairment indicators as described above is identified at the end of the reporting period or throughout the year with respect to an investment property, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows.  An investment property is considered to be impaired when the estimated future undiscounted cash flows are less than its current carrying value.  When performing a test for recoverability or estimating the fair value of an impaired investment property, the Company makes complex or subjective assumptions which include, but are not limited to:

·

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

·

projected capital expenditures and lease origination costs;

·

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

·

comparable selling prices; and

·

property specific discount rates for fair value estimates as necessary.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties.  Based on evaluation, there were no impairment losses during the nine months ended September 30, 20172022 and 2016. 2021.

Properties Held for Sale

We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component or group of components of an entity either has been disposed of or is classified as held for sale. 

In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of: (1) its carrying amount, or (2) fair value less costs to sell.  In addition, a property being held for sale ceases to be depreciated.  We classify operating properties as properties held for sale in the period in which all of the following criteria are met:

·

management, having the authority to approve the action, commits to a plan to sell the asset;

·

the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

·

an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

·

the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

·

the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

·

given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

The results of operations of a component of an entity that either has been disposed of or is classified as held-for-sale under the requirements of ASC 360 shall be reported in discontinued operations in accordance with ASC 205, Presentation of Financial Statements (“ASC 205”) if such disposal or classification represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

There were no properties classified as held for sale at September 30, 2017.  There was one retail property classified as held for sale at December 31, 2016.  See Note 17.

Construction in Progress

The Company capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes.  At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes and interest and financing costs cease and all project-related costs included in construction in process are reclassified to land and building and other improvements.

Cash and Cash Equivalents

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings, contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the nine months ended September 30, 2017 and 2016.

We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operations and financial policies of the investee.  We will also use the equity method for investments that do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810.  For a joint venture accounted for under the equity method, our share of net earnings and losses is reflected in income when earned and distributions are credited against our investment in the joint venture as received.

In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns.  As of September 30, 2017, our tenant in common arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810.

As of September 30, 2017 and December 31, 2016, the unconsolidated affiliates held total assets of $23,930 and $26,140 and mortgage notes payable of $17,561 and $20,017, respectively.

The operating partnership previously owned a 40.26% interest as a tenant in common in a single asset limited liability company which owns a 144 unit residential, multifamily apartment complex in Bismarck, North Dakota. The property was encumbered by a first mortgage with a balance at December 31, 2016 of $2,190. As of May 1, 2017, there was a change in control over the real estate investment, with the operating partnership acquiring the other tenant in common’s 59.74% ownership interest in the property (see Note 18).  We estimated the property had a fair value of approximately $10,080.  The operating partnership assumed a loan of $1,295 and issued $4,727 of limited partnership units for a total purchase price of approximately $6,022.  The company accounted for this as a business combination and recognized a gain on change in control of real estate investment of $2,186 in the second quarter of 2017 as a result of remeasuring the carrying value to fair value.

The operating partnership is a 50% owner of Grand Forks Marketplace Retail Center as a tenant in common through 100% ownership in a limited liability company.  Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2017 and December 31, 2016 of $10,743 and $10,891, respectively. The Company is jointly and severally liable for the full mortgage balance.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2017 and December 31, 2016 of $6,818 and $6,936, respectively. The Company is jointly and severally liable for the full mortgage balance.

Receivables

Receivables consist primarily of amounts due for rent. The receivables are non-interest bearing.  The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected.  As of September 30, 2017 and December 31, 2016, management determined no allowance was necessary for uncollectible receivables.

Financing and Lease Costs

Financing costs have been capitalized and are being amortized over the life of the financing (line of credit) using the effective interest method.  Unamortized financing costs are written off when debt is retired before the maturity date and included in interest expense at that time. 

Lease costs incurred in connection with new leases have been capitalized and are being amortized over the life of the lease using the straight-line method. We record the amortization of leasing costs in depreciation and amortization on the consolidated statements of operations and comprehensive income. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense.

Debt Issuance Costs

We amortize external debt issuance costs using the effective interest rate method, over the estimated life of the related debt. We record debt issuance costs related to notes and mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit on our consolidated balance sheets as financing fees, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.

Lease Intangible Assets

Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases, tenant relationships and the value of leases with above or below market lease terms. Lease intangibles are amortized over the term of the related lease.

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no impairment charges were necessary at September 30, 2017 and December 31, 2016.

Noncontrolling Interest

A noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity.  In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

parent and the noncontrolling interest and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the consolidated statements of operations and comprehensive income. 

Operating Partnership: Interests in the operating partnership held by limited partners are represented by operating partnership units.  The operating partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.

Partially Owned Properties: The Company reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Company that are not wholly owned by the Company.  The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interests in partially owned properties in the consolidated statement of operations and comprehensive income.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to beneficial and noncontrolling interest.

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in generally the same manner as they are taxed on other corporate distributions.

We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the financial statements.

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP.  The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 (UNAUDITED)

(Dollar amounts in accordance with the provisions of the Internal Revenue Code 704(b)thousands, except share and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.per share data)

We follow FASB ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 20172022 and December 31, 20162021 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2013.2018.

Revenue Recognition

The operating partnership has electedTrust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

Revenue Recognition

We derive over 95% of our revenues from tenant rents and other tenant-related activities. Wedetermine lease multifamily units under operating leases with terms of one year or less. Rental income and other property revenues are recorded when due from tenants and recognized monthly as earned pursuant to the terms of the underlying leases.  Other property revenues consist primarily of laundry, application and other fees charged to tenants. 

We lease commercial space primarily under long-term lease agreements. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and a straight-line rent adjustment. We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $59 and $124 for the three months ended September 30, 2017 and 2016, respectively. The straight-line rent adjustment increased revenue by $186 and $391 the nine months ended September 30, 2017 and 2016, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets asclassification. As of September 30, 2017 and December 31, 2016 was $3,526 and $3,362, respectively. We receive payments for expense reimbursements from substantially2022 all our multi-tenant commercial tenants throughoutleases analyzed under the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.Trust’s lease classification process were determined to be operating leases.

Commercial properties are leased to tenants under terms expiring at various dates through 2034. Lease terms often include renewal options.  For the nine months ended September 30, 2017 and 2016, gross revenues from commercial property rentals, including CAM income (common area maintenance) of $4,592 and $4,547, respectively, totaled $20,619 and $20,632, respectively

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had no dilutive potential common shares as ofduring the nine months ended September 30, 2017 and 2016,2022 and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the three months ended September 30, 2017 and 2016, Sterling’s denominators for the basic and diluted earnings per common share were approximately 8,356,000 and 7,891,000, respectively. For the nine months ended September 30, 20172022 and 2016,2021, Sterling’s denominators for the basic and diluted earnings per

common share were approximately 8,234,00010,572,000 and 7,791,000,10,095,000, respectively.

Recent Accounting Pronouncements

In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers, which was issued by the FASB as Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, supersedes most current GAAP applicable to revenue recognition and converges U.S. and international accounting standards in this area. The core principle of the new guidance is that revenue shall only be recognized when an entity has transferred control of goods or services to a customer and for an amount reflecting the consideration to which the entity expects to be entitled for such exchange. Additionally, lease contracts are specifically excluded from ASU 2014-09. In July 2015, the FASB decided to defer the effective date for annual reporting periods beginning after December 15, 2017.  Early adoption is permitted beginning on the original effective date of periods beginning after December 15, 2016. Upon adoption, ASU 2014-09 allows for full retrospective

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

adoption applied to all periods presented or modified retrospective adoption with the cumulative effect of initially applying the standard recognized at the date of initial application. We have performed a review of the requirements of the new guidance and have identified which of our revenue streams will be within the scope of ASU 2014-09.  We are working through an adoption plan which includes a review of transactions supporting each revenue stream to determine the impact of accounting treatment under ASU 2014-09, an evaluation of the method of adoption and assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting. We will adopt this standard effective as of January 1, 2018 and will utilize the cumulative effect transition method of adoption. The adoption of this guidance will not have a material impact on our financial position or results of operations. We expect this standard will have an impact on the disclosure of certain lease and non-lease components of revenue from leases upon the adoption of the update ASU 2016-02, Leases, but will not have a material impact on “total revenues.”

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends existing accounting standards for lease accounting, including by requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier application permitted. The Company is evaluating the impact of ASU No. 2016-02 on its financial position and results of operations.

In January 2017, the FASB issued a new standard which clarifies the definition of a business. The standard's objective is to add additional guidance that assists companies in determining whether transactions should be accounted for as an asset acquisition or a business combination. The new standard first requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If this threshold is not met, the entity next evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. Among other differences, transaction costs associated with asset acquisitions are capitalized while those associated with business combinations are expensed as incurred. In addition, purchase price in an asset acquisition is allocated on a relative fair value basis while in a business combination it is generally measured at fair value. The Company early adopted the new standard as allowed effective July 1, 2017. The Company concluded that substantially all of its transactions will now be accounted for as asset acquisitions, which means transaction costs will largely be capitalized as noted above.  The adoption of this pronouncement resulted in the Company’s acquisition of investment property subsequent to July 1, 2017 to qualify as asset acquisition and as such, the related transaction costs of $158 were capitalized.

In November 2016, the FASB issued ASU No. 2016-18 to require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The pronouncement requires a retrospective transition method of adoption. Upon adoption, the Company will include amounts generally described as restricted cash within the beginning-of-period, change and end-of-period total amounts on the statement of cash flows rather than within an activity on the statement of cash flows.

In August 2016, the FASB issued ASU No. 2016-15 to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on its consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.

Reclassifications

Certain amounts previously reported in our quarterly report ended September 30, 2016 have been reclassified to conform to the consolidated balance sheet, statement of operations and cash flows presentations in 2017. 

NOTE 3 – segment reporting

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multifamily properties. Our commercial properties include retail, office, industrial, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance, and directproperty administrative costs)and management fees). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees, and certain general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.

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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, 20172022 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (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

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016

 

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

 

(in thousands)

Income from rental operations

 

$

64,579

 

$

20,619

 

$

85,198

 

$

59,990

 

$

20,632

 

$

80,622

Expenses from rental operations

 

 

35,630

 

 

5,600

 

 

41,230

 

 

32,353

 

 

5,202

 

 

37,555

Net operating income

 

$

28,949

 

$

15,019

 

$

43,968

 

$

27,637

 

$

15,430

 

$

43,067

Interest

 

 

 

 

 

 

 

 

13,938

 

 

 

 

 

 

 

 

13,740

Depreciation and amortization

 

 

 

 

 

 

 

 

16,170

 

 

 

 

 

 

 

 

16,711

Administration of REIT

 

 

 

 

 

 

 

 

4,208

 

 

 

 

 

 

 

 

4,187

Loss on lease terminations

 

 

 

 

 

 

 

 

146

 

 

 

 

 

 

 

 

299

Other (income)/expense

 

 

 

 

 

 

 

 

(5,240)

 

 

 

 

 

 

 

 

(473)

Net income

 

 

 

 

 

 

 

$

14,746

 

 

 

 

 

 

 

$

8,603

Segment Assets and Accumulated Depreciation

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Real estate investments

 

$

552,792

 

$

202,337

 

$

755,129

Accumulated depreciation

 

 

(73,008)

 

 

(33,265)

 

 

(106,273)

 

 

$

479,784

 

$

169,072

 

 

648,856

Cash and cash equivalents

 

 

 

 

 

 

 

 

20,991

Restricted deposits and funded reserves

 

 

 

 

 

 

 

 

7,894

Investment in unconsolidated affiliates

 

 

 

 

 

 

 

 

2,785

Receivables and other assets

 

 

 

 

 

 

 

 

5,617

Financing and lease costs, less accumulated amortization

 

 

 

 

 

 

 

 

776

Intangible assets, less accumulated amortization

 

 

 

 

 

 

 

 

13,863

Total Assets

 

 

 

 

 

 

 

$

700,782

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Real estate investments

 

$

514,341

 

$

200,959

 

$

715,300

Accumulated depreciation

 

 

(63,148)

 

 

(29,177)

 

 

(92,325)

 

 

$

451,193

 

$

171,782

 

 

622,975

Cash and cash equivalents

 

 

 

 

 

 

 

 

12,034

Restricted deposits and funded reserves

 

 

 

 

 

 

 

 

7,213

Investment in unconsolidated affiliates

 

 

 

 

 

 

 

 

3,653

Receivables and other assets

 

 

 

 

 

 

 

 

5,354

Financing and lease costs, less accumulated amortization

 

 

 

 

 

 

 

 

950

Assets held for sale

 

 

 

 

 

 

 

 

2,482

Intangible assets, less accumulated amortization

 

 

 

 

 

 

 

 

15,852

Total Assets

 

 

 

 

 

 

 

$

670,513

19


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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (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 investmentsis 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 asa 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 primarily2022, 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 IIIa 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 constructionproperty. As of both September 30, 2022, the Operating Partnership has contributed $3,042 in Bismarck, North Dakota.  Phase IIIcash 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 developmentfirst mortgage at December 31, 2021. The Company is stilljointly 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 constructionOperating 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, 20172022 and 20162021 (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)

16

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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) unsecuredDecember 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

21


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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

balance outstanding on the linessecures one letter of credit totaling $50, leaving $37,015$9,865 available and unused under the agreements. CertainThese 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 linelines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.  As

17

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 were2022 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’sTrust’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, 20172022 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. 

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

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 variablemanage our exposure to interest rate costs associated with existing borrowings. To meet these objectives, we have entered intomovements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty. In exchange, 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.

18

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 $2,450accompanying 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 amountamounts of the swaps have been adjusted to their fair valuesvalue at the end of the quarter, which because of changes in forecasted levels of LIBOR 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.  Theswap.  Accounting for interest rate swaps are accounted for asis considered an effective hedgeshedge in accordance with ASC 815-20 whereby they areit is recorded at fair value and changes in fair value are recorded to accumulated comprehensive income.

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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

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 nine 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

$

(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, 20172022, 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 liability2021 (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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

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

·

Level 1 – Quoted prices for identical instruments(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.

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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 expectationvalue of the future cash flows ofsecurity investments represents the variable component. The fixed and variable components ofprice the derivative are then discounted using calculated discount factors developedinvestments could sell at on the open market based on the LIBOR swap rate and are aggregated to arrivemarket 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.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

Fair Value Disclosures

The following table presents the Company’sTrust’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 CompanyTrust for similar debt instruments of comparable maturities by the Company’sTrust’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, 20172022 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 determinedrate 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (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, 20172022, 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 8,353,000non-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 asthe 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 holdersAs 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 holders2022, 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 sharesarea maintenance costs which are reimbursed by tenants in accordance with a methodspecific 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 registeredreimbursement 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 sharesassociated 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (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.

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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, 20172022 and 2016,2021, we paid property management and administrative fees to GOLDMARK Property Management, in an amount equal toInc. 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. Forthese fees during the nine months ended September 30, 20172022 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, 20172022 and 2016,2021, we paid repair and maintenance related payrollexpenses, 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 descriptionAdvisor may receive fees related to management of the currentTrust, acquiring, disposing, or developing real estate property, project management fees, and compensation that may be received by the Advisorfinancing 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (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 transactionfees 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 servicesOperating 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.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

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 IncomeCommissions

During the nine months ended September 30, 20172022 and 2016,2021, we received rental incomeincurred real estate commissions of $166$371 and $161,$297, respectively, under an operating lease agreement withto 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, 20172022 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, 20172022 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, 20172022 and 20162021 (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.

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

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 soldOperating Partnership disposed of four properties. One property located in Savage, Minnesota was disposed of for $2,700 with a medicalrecognized gain of $1,328. One property located in Eau Claire, WisconsinMoorhead, 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 lossgain of $316.$1,710.

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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 followingTrust 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, 20172022 was completed through issuing approximately 603,000539,000 limited partnership units of the operating partnershipOperating 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20172022 and 20162021 (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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017 and 2016 (UNAUDITED)

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

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.

3429


All dollar amounts in this Form 10-Q in Part I ItemsItem 2. through Item 4 and Part II ItemsItem 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 operateSterling 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 Partnershipa 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 sharesInternal Revenue Code, which requires that 75% of the assets and income of our operating partnership are deemed to bea 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 toallocated 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 formedsame 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 164184 properties containing 9,33511,018 apartment units and approximately 1,691,0001,512,000 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 disposethe preparation of our existing commercial properties.

As of September 30, 2017, approximately 71.0% of our properties were apartment communities located primarilythe 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. 

35


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

Our Boardparticularly important for an understanding of Trusteesthe financial position and Executive Officers

We operate underresults of operations presented in the directionhistorical 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 approvedunaudited consolidated financial statements). These policies require the application of judgment and assumptions by the Board of Trustees (including all the independent trustees) on April 6, 2017, effective January 1, 2017.  Our Board of Trustees has provided investment guidance for the Advisor to follow,management and, must approve each investment recommended by the Advisor. Currently, we have nine members on our board, seven of whom are independent.

Our Advisor

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

Conflicts of Interest

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

30

Impairment of Real Estate Investments

The Trust’s investment properties are reviewed for potential impairment at the conflictsend of interesteach 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 personnelExamples of our Advisor (herein individually and collectively our “Leadership”) may spend a portion of their time on activities unrelated to us, which may significantly reduce the amount of timesituations considered to be spentimpairment indicators include, but are not limited to:

oa substantial decline or negative cash flows;
ocontinued low occupancy rates;
ocontinued difficulty in leasing space;
osignificant financially troubled tenants;
oa change in plan to sell a property prior to the end of its useful life or holding period;
oa significant decrease in market price not in line with general market trends; and
oany 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 relatingthe estimated future undiscounted cash flows. An investment property is considered to their Other Real Estate Related Activities.  These fiduciary duties may conflict with Leadership’s duties to Sterling andbe impaired when the estimated future undiscounted cash flows are less than its shareholders.   Leadership’s Other Real Estate Related Activities could result in actionscurrent carrying value.  When performing a test for recoverability or inactions detrimental to Sterling, which could harmestimating the implementation of Sterling’s business strategies and Sterling’s investments.  If Sterling does not successfully implement its business strategy, we may be unable to generate cash needed to pay dividends to shareholders and to maintain or increase thefair value of our assets. an impaired investment property, the Trust makes complex or subjective assumptions which include, but are not limited to:

oprojected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;
oprojected capital expenditures;
oprojected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;
ocomparable selling prices; and
oproperty specific discount rates for fair value estimates as necessary.

36


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

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

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

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

37


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

Competition in Acquiring, Leasing and Operating of Properties

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

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

Joint Ventures with Affiliates

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

Conflict Resolution

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

Critical Accounting Estimates

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

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the nine months ended September 30, 20172022 included elsewhere in this report.

31

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 tensix 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.

38


·

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 Dakotatwo residential and recognized a gain of $2,072 (see Note 17 totwo 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

32

Results of Operations for the Three Months Ended September 30, 20172022 and 20162021

    

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 partnershipOperating Partnership to limited partners.

Revenues

Property revenues of $28,655$34,531 for the three months ended September 30, 20172022 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, 20172022 increased $1,782$1,388 or 5.0% in comparison to the same period for 2016.2021. Residential properties acquired since January 1, 20162021 contributed approximately $1,563$1,007 to the increase in total residential revenues in the three months ended September 30, 2017.  Rental income from2022. The increase is also attributed to a $186 increase in Ratio Utility Billing Systems (RUBS) for total residential properties

39


owned for more than one year increased approximately $219revenues in comparison to the same periodthree 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, 20172022 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.

33

For the three months ended September 30, 20172022 total commercial revenues decreased $15increased $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 wasincrease is primarily attributed to decreasesfull occupancy at an office park located in straight-line rent adjustments andFargo, ND, partially offset by the saledispositions 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, 20172022 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, 20172022 increased $1,217$859 or 10.5%5.6% in comparison to the same period in 2016. This2021. The increase wasis primarily attributed to thea $196 or 23.8% increase in numberproperty 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 ownedacquired 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 $1032022 decreased $604 or 5.4%26.0% in comparison to the same period in 2016.2021. The increase wasdecrease is primarily attributed to increasesdecreased 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 propertyof $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, 20172022 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 forrelated to financing activities increased by $393 during the three months ended September 30, 2017 and 2016,  respectively. 

Depreciation and amortization2022 as compared to the same period in 2021. The primary reason for increased interest expense decreased 0.8% from $5,471 foron debt is due to increased mortgage balance on the portfolio as a whole. During the three months ended September 30, 2016 to $5,427 for2022 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 decrease2022 increased $569 or 10.3% in amortization relatedcomparison 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 performanceamortized 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 depreciationintangible 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 measurepercentage 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

40


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

Net Income

Netrental income for the three months ended September 30, 20172022 and 2021 was $3,256 compared to $2,523 for17.7% and 16.8%, respectively.

REIT administration expenses of $1,471 during the three months ended September 30, 2016.  The increase was primarily attributed2022 increased $464 or 46.1% in comparison to the same period in 2021, due to an increase of $447 in net operatingREIT 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 due2022 increased $4,819 or 307.5% in comparison to the Company’s early adoptionsame period in 2021. This is primarily attributable to an increase in realized gains on sale of ASU 2017-01real 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.

34

Results of Operations for the Nine Months Ended September 30, 20172022

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 partnershipOperating Partnership to limited partners.

Revenues

Property revenues of $85,198$101,264 for the nine months ended September 30, 20172022 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

%

41


Residential revenues for the nine months ended September 30, 20172022 increased $4,589$5,194 or 6.5% in comparison to the same period for 2016.2021. Residential properties acquired since January 1, 20162021 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 $5452022. Increased lease renewals, resulting in comparisondecreased 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, 20172022 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 primarilyis attributed to the sale of commercial building for resulting in a retail property$512 decrease in June 2017 which contributedrevenue. The decrease is also attributed to nine monthsan 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, 20172022 compared to 25.6%17.3% of total revenues for the nine months ended September 30, 2016.2021.

35

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 ratesincrease 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, 20172022 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 attributed2021. 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, 20172022 and 20162021 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 $4,187of $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 20172022 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.

42


Net Operating Income

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders 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, 20172022 increased $4,954 or 114.2% in comparison to the same nine month period in 2016 due primarily to a $4,5892021. 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 primarilyis attributed to decreased revenues duerealized gains on sale of $8,187 as compared to prior year for the sale of a retail propertyfour properties. This is offset by the decrease in June 2017gain from involuntary conversion of $633 and a medical propertydecrease in April 2016equity in affiliates of $1,740, caused by depreciation expense related to two developments being put into service.

Construction in Progress and increasedDevelopment 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 propertyinterest, 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 propertyMinnesota. 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 loansclub house for residents, parking lot additions and repairs and replacement of $2,662, assumed liabilitieswindows and patio doors on the other two buildings. The re-development of $78one building is substantially complete and cashis pending final invoices to be received. The parking lot and clubhouse will remain in construction phase throughout the fourth quarter of $7,352.  

During2022. 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 propertydamaged 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 exerciseconstruction-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

4336


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.

4437


The following tables include calculations of FFO, and MFFO, and the reconciliations to net income, for the three and nine months ended September 30, 20172022 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

45


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 thethe: (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 partnershipOperating Partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary.

38

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 expecthave 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.

39

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 cashthe Company’s needs for acquisitionsat least the next 12 months and other real-estate investments fromas appropriate, we will use cash flowflows 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

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

Credit Quality of Tenants

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

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

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

Lease Expirations and Occupancy

No significantGenerally our residential leases are scheduled to expirefor a term of one year or renew 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

46


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

Nine months ended

September 30,

    

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)

40

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, 20172022 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, 20172022 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, 20172022 and 2016,2021, cash flows used in investing activities related primarilyspecifically 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 changes2021, cash flows used in restricted cash for replacement reserve escrowsinvesting 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 salesales 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.  During2022 and 2021. For the nine months ended September 30, 2016, proceeds of $1,404 were generated from the sale of one commercial medical property2022 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.

47


Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 20172022 to September 30, 20172022 totaling $6,111$9,114 or $0.7425$0.8625 per share, including amountsof 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, 20162021 to September 30, 20162021 totaling $5,606$8,020 or $0.7200$0.7950 per share, including amountsof 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 flowsflow 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.

41

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 partnershipOperating Partnership agreement provides that our operating partnershipOperating 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 $12,909totaling $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 $11,546totaling $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.

48


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

49


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

Item 3. Quantitative and QualitativeQualitative Disclosures about Market Risk

The 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. OurThese 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 marketinterest rate risk, for changeswe may become vulnerable to significant fluctuations in interest rates relates primarily toon any future repricing or refinancing long-termof our fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and ouror variable rate linesdebt or future debt.

42

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 AccountingFinancial 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 AccountingFinancial 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


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 partnershipOperating 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 no2022, we did not issue any common shares in exchange for limited partnership units of the operating partnershipOperating Partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant tounder 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 maximuman 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 $15.50became 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.

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Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

45

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 AccountingFinancial 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 AccountingFinancial 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 (eXtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 20172021 and December 31, 2016;2020; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended September 30, 20172021 and 2016;2020; (iii) Consolidated StatementStatements 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, 20172021 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


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, 20179, 2022

STERLING REAL ESTATE TRUST

By:

/s/ Kenneth P. Regan

Kenneth P. Regan

Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Angie D. StockDamon K. Gleave

Angie D. StockDamon K. Gleave

Chief AccountingFinancial Officer

(Principal Financial and Accounting Officer)

5347