STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

lease intangibles, and (v) ~~any~~ assumed financing that is determined to be above or below market, ~~(vi) the value of customer relationships and (vii) goodwill,~~ if any. Transaction costs related to acquisitions ~~accounted for as business combinations~~ are ~~expensed as incurred and included within “Administration of REIT expenses” in the~~

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

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

For tangible assets acquired, including land, building and other improvements, the ~~Company~~Trust 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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

the three months ended September 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 expense~~expensed as incurred.

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


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

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

The ~~Company’s~~Trust’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 ~~Company~~Trust 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.~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~ 2022.

~~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.~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

~~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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

The 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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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 generally taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.

We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, 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 in accordance with the provisions of the Internal Revenue Code 704(b) 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.

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022, 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.

~~The operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.~~

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

Revenue Recognition

~~We derive over 95%~~The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of ~~our revenues from tenant rents and other tenant-related activities. We~~March 31, 2023, all leases analyzed under the Trust’s lease ~~multifamily units under~~classification process were determined to be 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 as of September 30, 2017 and December 31, 2016 was $3,526 and $3,362, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

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

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had no dilutive potential common shares ~~as of September 30, 2017 and 2016,~~during the three months ended March 31, 2023 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~~March 31, 2023 and ~~2016,~~2022, Sterling’s denominators for the basic and diluted earnings per common share were approximately ~~8,356,000~~10,952,000 and ~~7,891,000,~~10,465,000, respectively. ~~For the nine months ended September 30, 2017 and 2016, Sterling’s denominators for the basic and diluted earnings per common share were approximately 8,234,000 and 7,791,000, 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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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 ~~direct~~property 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.

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.

Three months ended  September 30, 2017

Three months ended  September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
21,863

$
6,792

$
28,655

$
20,081

$
6,807

$
26,888
Expenses from rental operations

12,764

2,023

14,787

11,547

1,920

13,467
Net operating income

$
9,099

$
4,769

$
13,868

$
8,534

$
4,887

$
13,421
Interest

4,690

4,636
Depreciation and amortization

5,427

5,471
Administration of REIT

885

1,136
Loss on lease terminations

—

25
Other (income)/expense

(390)

(370)
Net income

$
3,256

$
2,523


	Three months ended March 31, 2023						Three months ended March 31, 2022
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Income from rental operations	$	29,920	$	5,260	$	35,180	$	27,494	$	5,422	$	32,916
Expenses from rental operations		20,203		1,718		21,921		16,508		1,678		18,186
Net operating income	$	9,717	$	3,542	$	13,259	$	10,986	$	3,744	$	14,730
Depreciation and amortization						6,552						5,782
Interest						5,355						4,845
Administration of REIT						1,311						1,217
Other loss (income)						729						(503)
Net (loss) income					$	(688)					$	3,389

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

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 March 31, 2023							Residential		Commercial		Total

As of September 30, 2017	Residential		Commercial		Total
	(in thousands)
							(in thousands)
Real estate investments	$	552,792	$	202,337	$	755,129	$	781,600	$	191,658	$	973,258
Accumulated depreciation		(73,008)		(33,265)		(106,273)		(151,675)		(48,901)		(200,576)
	$	479,784	$	169,072		648,856
Total real estate investments, net							$	629,925	$	142,757	$	772,682
Lease intangible assets, less accumulated amortization								328		4,261		4,589
Cash and cash equivalents						20,991						12,064
Restricted deposits and funded reserves						7,894
Restricted deposits												9,245
Investment in securities												10,111
Investment in unconsolidated affiliates						2,785						29,889
Receivables and other assets						5,617
Financing and lease costs, less accumulated amortization						776
Intangible assets, less accumulated amortization						13,863
Notes receivable												9,789
Other assets, net												24,789
Total Assets					$	700,782					$	873,158

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


As of December 31, 2022	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	779,424	$	191,724	$	971,148
Accumulated depreciation		(147,115)		(47,734)		(194,849)
Total real estate investments, net	$	632,309	$	143,990	$	776,299
Lease intangible assets, less accumulated amortization		839		4,451		5,290
Cash and cash equivalents						3,257
Restricted deposits						9,323
Investment in securities						29,371
Investment in unconsolidated affiliates						29,423
Notes receivable						8,448
Other assets, net						27,312
Total Assets					$	888,723

NOTE 4 – restricted deposits and funded reserves

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


	As of March 31,		As of December 31,
	2023		2022

	(in thousands)
Tenant security deposits	$	6,410	$	6,242
Real estate tax and insurance escrows		1,051		1,336
Replacement reserves		1,784		1,745
	$	9,245	$	9,323

1912

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

~~note 4 – real estate investments~~

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

Construction in progress as of September 30, 2017 consists primarily of development and planning costs associated with phase III of a multifamily apartment community under construction in Bismarck, North Dakota. Phase III of the development is still in the planning stages and construction has not yet commenced.

NOTE 5 – ~~NOTES RECEIVABLE~~INVESTMENT IN UNCONSOLIDATED AFFILIATES

~~Notes receivable primarily consisted~~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	March 31, 2023		December 31, 2022
Banner Building	2007	66.67%	$	(444)	$	(614)
Grand Forks INREIT, LLC	2003	50%		5,057		4,961
SE Savage, LLC	2019	60%		1,479		1,660
SE Maple Grove, LLC	2019	60%		1,277		1,836
SE Rogers, LLC	2020	60%		2,019		2,413
ST Oak Cliff, LLC	2021	70%		8,922		9,098
SE Brooklyn Park, LLC	2021	60%		2,354		2,914
SE Fossil Creek, LLC	2022	70%		9,225		7,155
			$	29,889	$	29,423

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 March 31, 2023 and December 31, 2022 of $6,860 and $6,951, respectively.

The Operating Partnership is a 50% owner of a ~~$600 note~~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 March 31, 2023 and December 31, 2022 of $9,453 and $9,520, 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 entity is encumbered by a first mortgage with a balance at March 31, 2023 of $30,622 and $30,726, respectively. The property is also encumbered by a second mortgage to ~~an unaffiliated party~~Sterling Properties, LLLP with a balance at March 31, 2023 and December 31, 2021 of $744 and $1,397, 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 that holds a multifamily property. The entity is encumbered by a construction mortgage with a balance at both March 31, 2023 and December 31, 2022 of $24,788. The property is also encumbered by a second mortgage to ~~provide working capital~~Sterling Properties, LLLP with a balance at both March 31, 2023 and December 31, 2022 of $3,643. The Trust is jointly and severally liable for ~~improvements on~~the full mortgage balance.

The Operating Partnership owns a ~~residential~~60% interest in a limited liability company that is currently developing a multifamily property. The LLC holds land located in Rogers, Minnesota, with total assets of $33,853 and $32,864 at March 31, 2023 and December 31, 2022, respectively. The entity is encumbered by a construction mortgage with a balance at both March 31, 2023December 31, 2022 of $25,742. The property ~~bearing~~is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at March 31, 2023 and December 31, 2022 of $3,292 and $2,938, respectively. The Trust is jointly and severally liable for the full mortgage balance.

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 both March 31, 2023 and December 31, 2022, the Operating Partnership has contributed $9,300, in cash to the entity. The entity holds land located in Dallas, Texas with total assets of $45,481 and $40,404 at March 31, 2023 and December 31, 2022, respectively. The entity is encumbered by 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.

construction mortgage

2013

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

with a balance outstanding related to the mortgage at March 31, 2023 and December 31, 2022 of $28,659 and $23,409, 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, with an unrelated third party. The entity is currently developing a multifamily property. The entity is located in Brooklyn Park, Minnesota, with total assets of $30,822 and $30,490 at March 31, 2023 and December 31, 2022, respectively. The entity is encumbered by a construction mortgage that has a balance of $24,592 and $24,448 at March 31, 2023 and December 31, 2022, respectively. The entity is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at March 31, 2023 of $1,659. There was no outstanding balance related to the second mortgage as December 31, 2022. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnerships owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of March 31, 2023 and December 31, 2022 the Operating Partnership has contributed $9,275 and $7,190, respectively, in cash to the entity. The entity holds land located in Fort Worth Texas with total assets of $20,731 and $11,083 at March 31, 2023 and December 31, 2022, respectively. The entity is encumbered by a construction mortgage with a balance outstanding related to the mortgage at March 31, 2023 of $2,726. There was no outstanding balance related to the mortgage at December 31, 2022. The Trust is jointly and severally liable for the full mortgage balance.

The following is a summary of the financial position of the unconsolidated affiliates at March 31, 2023 and December 31, 2022.


	March 31, 2023		December 31, 2022

	(in thousands)
ASSETS
Real estate investments	$	234,751	$	218,747
Accumulated depreciation		(18,966)		(16,490)
		215,785		202,257
Cash and cash equivalents		2,815		3,093
Restricted deposits		1,297		1,034
Note receivable		1,224		—
Intangible assets, less accumulated amortization		822		542
Other assets, net		724		827
Total Assets	$	222,667	$	207,753

LIABILITIES
Mortgage notes payable, net	$	161,649	$	152,246
Tenant security deposits payable		248		192
Accrued expenses and other liabilities		13,180		8,217
Total Liabilities	$	175,077	$	160,655
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	47,590	$	47,098

Total liabilities and shareholders' equity	$	222,667	$	207,753

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

The following is a summary of results of operations of the unconsolidated affiliates for the three months ended March 31, 2023 and 2022.


	Three months ended March 31,
	2023		2022

	(in thousands)
Income from rental operations	$	3,707	$	1,730
Expenses from rental operations		1,778		812
Net operating income	$	1,929	$	918
Depreciation and Amortization		2,492		1,827
Interest		1,344		1,012
Other expense		(85)		10
Net loss	$	(1,822)	$	(1,931)

NOTE 6 - Lease intangibles

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

Lease

Accumulated

Lease
As of September 30, 2017

Intangibles

Amortization

Intangibles, net
Lease Intangible Assets

(in thousands)
In-place leases

$
23,239

$
(11,413)

$
11,826
Above-market leases

3,115

(1,078)

2,037

$
26,354

$
(12,491)

$
13,863
Lease Intangible Liabilities

Below-market leases

$
(3,170)

$
1,324

$
(1,846)


							Lease		Accumulated		Lease
As of March 31, 2023							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	$	15,528	$	(11,632)	$	3,896
Above-market leases		3,115		(910)		2,205		1,897		(1,204)		693
	$	26,622	$	(10,770)	$	15,852
							$	17,425	$	(12,836)	$	4,589
Lease Intangible Liabilities
Below-market leases	$	(3,197)	$	1,122	$	(2,075)	$	(2,380)	$	1,771	$	(609)


	Lease		Accumulated		Lease
As of December 31, 2022	Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)
In-place leases	$	15,528	$	(10,960)	$	4,568
Above-market leases		1,897		(1,175)		722
	$	17,425	$	(12,135)	$	5,290
Lease Intangible Liabilities
Below-market leases	$	(2,379)	$	1,733	$	(646)

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)
2023 (April 1, 2023 - December 31, 2023)	$	896	$	113
2024		757		151
2025		757		151
2026		606		80
2027		498		42
Thereafter		1,075		72
	$	4,589	$	609

~~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 variable rate (1-month LIBOR 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%) 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; and Grand Forks, North Dakota. We also have a $2,000 variable rate (prime rate less 0.5%) unsecured line of credit agreement with Bremer Bank, which expires October 2018; and a $3,000 variable rate (prime rate) unsecured line of credit agreement with Bell Bank, which expires December 2017. At September 30, 2017, there was no

2115

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

~~balance outstanding on the~~

NOTE 7 – LINES OF CREDIT

We have a $4,915 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in December 2026; and a $5,000 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires December 2026. The lines of credit are secured by specific properties. At March 31, 2023, the Bremer Bank line of credit secures one letter of credit totaling $50, leaving ~~$37,015~~$9,865 available and unused under the agreements. ~~Certain of the variable~~These operating lines ~~of credit have limits~~are designed to enhance treasury management activities and more effectively manage cash balances. There was no balance outstanding on ~~availability based on collateral specific critieria.~~either line at March 31, 2023 and $1,008 at December 31, 2022.

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

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

NOTE 8 - NOTES PAYABLE

On December 29, 2022, the Trust entered into a $26,500 note payable. The note payable bears interest at a rate of one percentage point under the “Prime Rate” as published in the Wall Street Journal, with principal plus accrued and unpaid interest due and payable on February 1, 2023. The Borrower may prepay the New Promissory Note without penalty. As of March 31, 2023, the Trust did not have any outstanding balance on the note payable. As of December 31, ~~2016, one residential property~~2022, the balance on the note payable was out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. A waiver was received from the lender. As of September 30, 2017, we were in compliance with all covenants.$26,500.

~~NOTE 8 - MORTGAGE NOTES PAYABLE~~

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


	Principal Balance At
	March 31,		December 31,
	2023		2022

	(in thousands)
Fixed rate mortgage notes payable (a)	$	531,918	$	508,305
Variable rate mortgage notes payable		-		-
Mortgage notes payable		531,918		508,305
Less unamortized debt issuance costs		2,143		2,138
	$	529,775	$	506,167

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~~$105,340 and ~~$3,056~~$108,734 of variable rate mortgage debt that was swapped to a fixed rate at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, respectively.

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

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

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

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of December 31, 2016, five loans on residential properties were out of compliance due to various unit renovation and parking lot repair and maintenance costs. The loans were secured by properties located in Fargo and Bismarck, North Dakota with a total outstanding balance of $8,336 at December 31, 2016. Annual waivers have been received from the lenders. As of September 30, 2017, we were in compliance with all covenants.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

Years ending December 31,

Amount

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

$
5,000
2018

20,095
2019

25,322
2020

28,001
2021

45,897
Thereafter

281,040
Total payments

$
405,355


Years ending December 31,	Amount
	(in thousands)
2023 (April 1, 2023 - December 31, 2023)	$	46,741
2024		22,433
2025		53,190
2026		73,110
2027		77,912
Thereafter		258,532
Total payments	$	531,918

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

NOTE 9 – DERIVATIVES AND HEDGING ACTIVITIES

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

As of March 31, 2023, 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 that qualify as cash flow hedges are recorded in accumulated other comprehensive loss and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. During the next 12 months, the Trust estimates that an additional $3,039 will be reclassified as a decrease to interest expense.

The following table summarizes the Trust’s interest rate swaps as of March 31, 2023, which effectively convert on month floating rate LIBOR to a fixed rate:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
November 1, 2019	$	6,523	3.15%	November 1, 2029
November 1, 2019	$	4,536	3.28%	November 1, 2029
January 10, 2020	$	2,956	3.39%	January 10, 2030
July 1, 2020	$	4,716	2.79%	June 10, 2030
December 2, 2020	$	12,273	2.91%	December 2, 2027
July 1, 2021	$	25,512	2.99%	July 1, 2031
November 10, 2021	$	27,903	3.54%	August 1, 2029
December 1, 2021	$	10,739	3.32%	December 1, 2031
August 15, 2022	$	1,479	3.07%	June 15, 2030
August 15, 2022	$	2,865	3.07%	June 15, 2030
August 15, 2022	$	1,601	2.94%	June 15, 2030
August 15, 2022	$	4,237	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	March 31, 2023	December 31, 2022		March 31, 2023		December 31, 2022
Interest rate swaps	12	12	$	105,340	$	106,033

The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the ~~notional amount of $1,294 and $2,450~~accompanying consolidated balance sheets. The valuation techniques are described in Note 10 to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature in April 2020 and December 2017, respectively. The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception.the consolidated financial statements.


Derivatives designated as	March 31, 2023			December 31, 2022
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	11,404	Other assets, net	$	13,782
Interest rate swaps	Accrued expenses and other liabilities	$	—	Accrued expenses and other liabilities	$	—

The carrying amount of the swaps have been adjusted to their fair ~~values~~value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting aan asset and liability for the fair value of the future net payments

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

forecasted under the ~~swaps.~~swap. The interest rate ~~swaps are~~swap is accounted for as an effective ~~hedges~~hedge in accordance with ASC 815-20 whereby ~~they are~~it is recorded at fair value and changes in fair value are recorded to ~~accumulated~~ comprehensive income.

The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended March 31, 2023 and 2022:



			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
		2023			2023
Interest rate swaps	$	2,378	Interest expense	$	(765)
		2022			2022
Interest rate swaps	$	(6,524)	Interest expense	$	361

Credit-risk-related Contingent Features

The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of ~~September 30, 2017 and December~~March 31, ~~2016, we recorded a liability and other accumulated comprehensive loss~~2023, the termination value of ~~$88 and $145, respectively.~~derivatives in an asset position was $11,404. As of March 31, 2023, the Trust has pledged the properties related to the loans which are hedged as collateral.

NOTE 10 - FAIR VALUE MEASUREMENT

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

September 30, 2017

December 31, 2016

Carrying

Carrying


Value

Fair Value

Value

Fair Value

(in thousands)
Financial liabilities:

Mortgage notes payable, net

$
402,465

$
402,866

$
390,479

$
402,015
Fair value of interest rate swaps

$
88

$
88

$
145

$
145


	March 31, 2023				December 31, 2022
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value

	(in thousands)
Financial assets:
Investment in securities	$	10,111	$	10,111	$	29,371	$	29,371
Notes receivable	$	9,789	$	11,346	$	8,448	$	9,789
Derivative assets	$	11,404	$	11,404	$	13,782	$	13,782

Financial liabilities:
Mortgage notes payable	$	531,918	$	492,925	$	508,305	$	466,245

~~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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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

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

●

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

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;~~

observable.

●

Level 3 – Instruments whose significant inputs are unobservable.

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

Recurring Fair Value Measurements

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

Level 1

Level 2

Level 3

Total

(in thousands)
September 30, 2017

Fair value of interest rate swaps

$
—

$
88

$
—

$
88
December 31, 2016

Fair value of interest rate swaps

$
—

$
145

$
—

$
145


	Level 1		Level 2		Level 3		Total

	(in thousands)
March 31, 2023
Derivative assets	$	—	$	11,404	$	—	$	11,404

December 31, 2022
Derivative assets	$	—	$	13,782	$	—	$	13,782

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

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~September 30, 2017 and December 31, 2016~~, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, theThe Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. ~~The Company’s derivative instruments are further described in Note 9.~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

Fair Value Disclosures

The following table presents the Company’s 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)
March 31, 2023
U.S. Treasury Bills	$	10,111	$	—	$	—	$	10,111
Mortgage notes payable	$	—	$	—	$	492,925	$	492,925
Notes receivable	$	—	$	—	$	11,346	$	11,346
December 31, 2022
U.S. Treasury Bills	$	29,371	$	—	$	—	$	29,371
Mortgage notes payable	$	—	$	—	$	466,245	$	466,245
Notes receivable	$	—	$	—	$	9,789	$	9,789

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

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

Mortgage notes payable: The ~~Company~~Trust estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the ~~Company~~Trust for similar debt instruments of comparable maturities by the ~~Company’s~~Trust’s lenders. ~~Judgment is~~The rate used ~~in determining the appropriate rate for each of the Company’s individual mortgages~~5.75%rch 31, 2023 and ~~notes payable based upon the specific terms of the agreement, including the term~~ranged from 5.75% to ~~maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 4.50% to 4.60% and from 4.00% to 4.35%~~6.00% at~~September 30, 2017 and~~ December 31, ~~2016, respectively.~~ 2022.

Notes receivable: The Trust estimates the fair value of ~~the Company’s matured mortgage~~its notes ~~payable were determined to be equal~~receivable by discounting future cash flows of each instrument at rates currently offered to the ~~carrying value of the properties because there is no market~~Trust for similar ~~debt~~note instruments of comparable maturities by the Trust’s lenders. The rate used was 7.25% at March 31, 2023 and ~~the properties’ carrying value was determined~~ranged from 3.25% to ~~be the best estimate of fair value as of September 30, 2017. The Company’s mortgage notes payable are further described in Note 8.~~7.25% at December 31, 2022.

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

As of ~~September 30, 2017~~March 31, 2023, we derived 84.8% 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, outstanding limited partnership units totaled 17,520,000~~non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and ~~16,688,000 respectively.~~ the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of ~~September 30, 2017 and 2016,~~March 31, 2023, we derived 15.2% 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 ~~operating partnership declared distributions of $4,336 and $3,912 respectively, to limited partners~~Consumer Price Index, which ~~were paid on October 16, 2017 and October 17, 2016, respectively. Distributions per unit were $0.7425 and $0.7200~~occur at specified times 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~~term of the ~~limited partnership,~~lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and ~~so long~~rental abatements from our ~~redemption plans exists and applicable holding periods are met,Limited Partners may request~~commercial leases on a straight-line basis over 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~~lease term. Recognition of rental income commences when control 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 madeleased space has been transferred to the ~~Limited Partner~~tenant.

We recognize variable income from pass-through expenses on an accrual basis over the periods in ~~cash. No Limited Partner may exercise an Exchange Request more than twice during any calendar year,~~which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses 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~~common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and reimbursements are included within “real estate rental income” along with the associated base rent in the accompanying consolidated financial statements.

Lease income related to the Company’s operating leases is comprised of the ~~limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.~~following:


	Three months ended March 31, 2023
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	28,656	$	3,943	$	32,599
Lease income related to variable lease payments		—		1,197		1,197
Other (a)		(119)		96		(23)
Lease Income (b)	$	28,537	$	5,236	$	33,773

~~NOTE 12 – REDEMPTION PLANS~~

(a)

For the three months ended March 31, 2023, “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 March 31, 2023 of $1,407, which is accounted for under the revenue recognition standard.

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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


	Three months ended March 31, 2022
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	26,498	$	4,067	$	30,565
Lease income related to variable lease payments		—		1,176		1,176
Other (c)		(169)		95		(74)
Lease Income (d)	$	26,329	$	5,338	$	31,667

(c)

For the three months ended March 31, 2022, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.

(d)

Excludes other rental income for the three months ended March 31, 2022 of $1,249, respectively, which is accounted for under the revenue recognition standard.

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

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

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

~~NOTE 13 – BENEFICIAL INTEREST~~

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of ~~September 30, 2017 and December~~March 31, ~~2016, there were 8,353,000 and 8,001,000 common shares outstanding, respectively. We had no preferred shares outstanding~~2023, non-cancelable commercial operating leases provide for future minimum rental income as ~~of either date.~~follows. Apartment leases are not included as the terms are generally for one year or less.


Years ending December 31,	Amount
	(in thousands)
2023 (April 1, 2023 - December 31, 2023)	$	11,818
2024		15,444
2025		15,020
2026		13,629
2027		12,200
Thereafter		44,335
	$	112,446

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

~~NOTE 14 – DIVIDEND REINVESTMENT PLAN~~

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

Under this plan, eligible shareholders may elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional optional cash purchases of our common shares, not to exceed $10 per fiscal quarter without our prior approval. The purchase price per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional optional cash purchases, as determined by our Board of Trustees. The estimated value per common share was $16.50 and $16.00 at September 30, 2017 and December 31, 2016, respectively. See discussion of determination of estimated value in Note 18.

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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

NOTE 1512 – RELATED PARTY TRANSACTIONS

Effective January 1, 2021, Trustmark Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC and GOLDMARK Property Management, ~~Fees~~Inc. In connection with this restructuring transaction, the owners of Trustmark Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management, Inc. Trustmark Enterprises, Inc. is owned in part by the Trust’s Chief Executive Officer and Trustee Mr. Kenneth P. Regan, by Trustee Mr. James S. Wieland, by President and Chief Investment Officer Joel S. Thomsen, by Chief Financial Officer and Treasurer Damon K. Gleave, and by General Counsel and Secretary Michael P. Carlson. In addition, Mr. Regan serves as the Executive Chairman, Chief Executive Officer and President of the Advisor, Mr. Thomsen serves as the Chief Investment Officer of the Advisor, Mr. Gleave serves as the Chief Financial Officer and Treasurer of the Advisor and Mr. Carlson serves as the General Counsel and Secretary of the Advisor. Messrs. Regan, Wieland, Thomsen, Gleave and Carlson serve on the Board of Governors of both the Advisor and GOLDMARK Property Management, Inc.

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.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

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 Fee

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, we paid ~~property management~~ fees to GOLDMARK Property Management, ~~in an amount equal~~Inc. related to the management of properties, on-site staff costs and other miscellaneous fees required to run the property of $12,836 and $3,429, respectively. Management fees paid during the year ended March 31, 2023 and 2022 approximated 5% of rents of the properties managed by GOLDMARK. GOLDMARK Property Management is owned in part by Kenneth Regan and James Wieland. For the nine months ended September 30, 2017 and 2016, we paid management fees of $8,510 and $7,411, respectively, to GOLDMARK Property Management.net collected rents. In addition, during the ~~nine months~~year ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, we paid repair and maintenance ~~related payroll~~expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling ~~$3,808~~$2,261 and ~~$3,554,~~$1,799, 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~~Executive Officers responsible for our management, we have no paid employees. The following is a brief description of the current fees and compensation that may be and was received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on ~~April 6, 2017,~~March 23, 2023 and is effective ~~January 1, 2017.~~ until March 31, 2024.

~~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.


	Three Months ended March 31,
	2023		2022

	(in thousands)
Fee:
Advisory	$	955	$	898
Acquisition	$	-	$	358
Disposition	$	-	$	66
Financing	$	44	$	32
Project Management	$	195	$	206

~~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

2722

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

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

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

~~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.


	Payable at
	March 31,		December 31,
	2023		2022

	(in thousands)
Fee:
Advisory	$	336	$	632
Acquisition	$	-	$	387
Disposition	$	-	$	72
Financing	$	7	$	-
Project Management	$	12	$	12

~~Acquisition Fees~~

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

~~Financing Fees~~

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

~~Disposition Fees~~

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

~~Development Fees~~

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

Operating Partnership Units Issued in Connection with Acquisitions

During the ~~nine~~three months ended ~~September 30, 2017, we issued directly or indirectly 899,000 operating partnership units.~~ March 31, 2023, there were no Operating Partnership units issued.

During ~~this period, 402,000 of~~ the ~~operating partnership~~three months ended March 31, 2022, 443,000 Operating Partnership units ~~issued~~ were issued to entities affiliated with Messrs. Regan and Wieland, two of our trustees, and Messr. Swenson, one of our former officers, in connection with the acquisition of various properties. The aggregate value of these units was $6,425.

During the nine months ended September 30, 2016, we issued directly or indirectly 1,086,000 operating partnership units. During this period, 458,000 operating partnership units issued were issued to entitiesan entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was ~~$7,167.~~ $10,180.

Commissions

During the ~~nine~~three months ended ~~September 30, 2017 and 2016,~~March 31, 2023, there were no real estate commissions paid to GOLDMARK Commercial Real Estate. During the three months ended March 31, 2022, we incurred real estate commissions of ~~$549 and $692, respectively, owed~~$244 to GOLDMARK Commercial Real Estate, ~~Services,~~ Inc. ~~(f/k/a GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc.)~~, in which ~~is controlled by~~ Messrs. Regan and ~~Wieland. There were no outstanding commissions owed as~~Wieland jointly own a controlling interest. As of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022, there were no unpaid commissions to GOLDMARK Commercial Real Estate.

~~Rental Income~~

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023, there were no commission paid to GOLDMARK Property Management. During the three months ended March 31, 2022, we incurred real estate commissions of $163, to GOLDMARK Property Management. As of March 31, 2023 and ~~2016,~~December 31, 2022, there were no unpaid commissions to GOLDMARK Commercial Real Estate.

Rental Income

During the three months ended March 31, 2023 and 2022, we received rental income of ~~$166~~$67 and ~~$161,~~$66, respectively, under an operating lease agreement with GOLDMARK Property ~~Management.~~Management, Inc.

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, we received rental income of ~~$41~~$33 and ~~$39, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.~~

~~During the nine months ended September 30, 2017 and 2016, we received rental income of $34 and $34,~~$32, respectively, under operating lease agreements with our Advisor.

~~Construction Costs~~During the three months ended March 31, 2023 and 2022, we received rental income of $225 and $209, respectively, under an operating lease agreement with Bell Bank.

~~As of September 30, 2017, since~~Other operational activity

During the ~~project’s inception, we~~three months ended March 31, 2023 and 2022, the Trust incurred ~~total~~$33 and $206, respectively, for general costs ~~of $8,997~~ related to ~~the~~business operations as well as capital expenditures related to construction ~~of Phase II of the Bismarck, North Dakota development project which consists of a clubhouse~~in progress that were paid to related parties. At March 31, 2023 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 clubhouse2022, operational outstanding liabilities were $32 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.

$168, respectively.

2923

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

Debt Financing

At March 31, 2023 and December 31, 2022, the Trust had $63,543 and $64,123, respectively, of outstanding principal on loans entered into with Bell Bank. During the three months ended March 31, 2023 and 2022, the Trust incurred interest expense on debt held with Bell Bank of $620 and $618, respectively. Accrued interest as of March 31, 2023 and December 31, 2022, related to this debt was $141 and $130, respectively.

At March 31, 2023, the Trust did not have an outstanding principal on a note payable entered into with Bell Bank. At December 31, 2022, the Trust had $26,500 of outstanding principal on a note payable entered into with Bell Bank. During the three months ended March 31, 2023, the Trust incurred interest expense on a note payable held with Bell Bank of $72. During the three months ended March 31, 2022, the Trust did not incur interest expense on a note payable held with Bell Bank.

Mezzanine Financing

The trust offers mezzanine financing to joint ventures, see note 5 for investment in unconsolidated affiliates. At March 31, 2023 and December 31, 2022, Sterling issued $9,338 and $5,854 respectively, in second mortgage financing to related entries.

During the three months ended March 31, 2023 and 2022, the trust earned interest income of $147 and $140 respectively, related to the second mortgage financing.

Insurance Services

The trust retains insurance services from Bell Insurance. Policies provided by these services provide insurance coverage for the Trust’s Commercial segment as well as Director and Officer general and liability coverage. For the three months ended March 31, 2023, total premiums incurred for this policy were $84. No premiums were incurred during the three months ended March 31, 2022.

Development Arrangements

During the three months ended March 31, 2023, no development fees were paid. During the three months ended March 31, 2022 the trust incurred $153 in development fees to Trumont Group. At March 31, 2023 and December 31, 2022, the Trust had no costs owed for development fees to Trumont Group.

During the three months ended March 31, 2023 and 2022, the Trust incurred $113 and $96 respectively, in construction fees to Trumont Construction. At March 31, 2023, no construction fees costs were owed. At December 31, 2022, the Trust owed $71 for construction fees to Trumont Construction.

During the three months ended March 31, 2023, and 2022 the Trust incurred $95 and $118 respectively, in general construction costs to Trumont Construction. At March 31, 2023, no general construction costs were owed. At December 31, 2022, the Trust owed $81 for general construction costs to Trumont Construction.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

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.

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,~~tornadoes, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.

Litigation

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

NOTE 1714 – DISPOSITIONS

During ~~September 2016,~~ the ~~Company entered into a purchase agreement to sell a retail~~three months ended March 31, 2023, the Trust did not dispose of any properties. During the three months ended March 31, 2022 the Trust disposed of one property located in ~~Fargo, North Dakota. This property qualified~~Savage, Minnesota, for held for sale accounting treatment upon meeting all applicable GAAP criteria on or prior to September 30, 2016, at which time depreciation and amortization ceased. As such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of December 31, 2016. During the second quarter ended June 30, 2017, the operating partnership sold the Fargo, North Dakota retail property for approximately $4,400$2,700 and recognized a gain of ~~$2,072.~~$1,328.

~~During~~

NOTE 15 – ACQUISITIONS

The Trust had no acquisitions during the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2023.

The Trust had one acquisition during the ~~operating partnership sold a medical property in Eau Claire, Wisconsin for approximately $1,400 and recognized a loss of $316.~~three months ended March 31, 2022.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Purchase Price

2/28/22

Deer Park

Hutchinson, MN

Apartment Complex

138 units

15,073

3025

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (UNAUDITED)

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

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

September 30,

December 31,

2017

2016

(in thousands)
ASSETS

Real estate investments

$
—

$
2,365
Restricted deposits and funded reserves

—

22
Receivables

—

25
Notes receivable

—

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

—

28

Total Assets

$
—

$
2,482

LIABILITIES

Special assessments payable

$
—

$
103
Tenant security deposits payable

—

22

Total Liabilities

$
—

$
125

~~NOTE 18 – ACQUISITIONS~~

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

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/10/17

Sargent Apartments

Fargo, ND

Apartment complex

36 units

$
1,710

$
1,710
1/11/17

Arrowhead Apartments

Grand Forks, ND

Apartment complex

82 units

5,494

5,494
1/17/17

West Oak Apartments

Fargo, ND

Apartment complex

18 units

777

777
1/17/17

Carr Apartments

Fargo, ND

Apartment complex

18 units

828

828
5/1/17

Plumtree Apartments

Fargo, ND

Apartment complex

18 units

907

907
5/1/17

Sunchase Apartments

Fargo, ND

Apartment complex

36 units

1,765

1,765
6/1/17

Essex Apartments

Fargo, ND

Apartment complex

18 units

858

858
6/1/17

Jadestone Apartments

Fargo, ND

Apartment complex

18 units

809

809
6/1/17

Park Circle Apartments

Fargo, ND

Apartment complex

18 units

903

903
7/3/17

East Bridge Apartments (a)

Fargo, ND

Apartment complex

58 units

6,060

6,060

$
20,111

$
20,111

~~(a)~~

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

Total consideration given for acquisitions through ~~September 30, 2017~~March 31, 2022 was completed through issuing approximately ~~603,000~~443,000 limited partnership units of the ~~operating partnership~~Operating Partnership valued at ~~$16.00~~$23 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~~$10,180, and cash of ~~$3,718.~~$4,893. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees and reflects the fair value at the time of issuance.

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

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

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/29/16

Titan Machinery

North Platte, NE

Implement dealership

16,480 sq. ft.

$
1,769

$
1,769
2/1/16

Bristol Park Apartments

Grand Forks, ND

Apartment complex

80 units

5,050

5,050
2/1/16

Redpath

White Bear Lake, MN

Office building

25,817 sq. ft.

4,000

4,000
3/1/16

Eagle Sky I Apartments

Bismarck, ND

Apartment complex

20 units

1,525

1,525
3/1/16

Eagle Sky II Apartments

Bismarck, ND

Apartment complex

20 units

1,525

1,525
5/4/16

Garden Grove Apartments

Bismarck, ND

Apartment complex

95 units

7,072

7,072
5/4/16

Washington Apartments

Grand Forks, ND

Apartment complex

17 units

667

667
8/1/16

Roughrider

Grand Forks, ND

Apartment complex

12 units

582

582
8/29/16

West 80 Development Land

Rochester, MN

Land

18.8 acres

900

900
9/13/16

Amberwood Apartments

Grand Forks, ND

Apartment complex

95 units

3,942

3,942

$
27,032

$
27,032

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

The following table summarizes the acquisition date fair values, before ~~prorations,~~pro-rations, the Company recorded in conjunction with the ~~acquisitions~~acquisition 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


	Year Ended
	March 31,
	2023		2022
Real estate investment acquired	$	-	$	14,831
Acquired lease intangible assets		-		260
Assumed Assets		-		2
Total Assets Acquired	$	-	$	15,093
Other liabilities		-		(20)
Net assets acquired		-		15,073
Equity/limited partnership unit consideration		-		(10,180)
Net cash consideration	$	-	$	4,893

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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

~~Estimated Value of Units/Shares~~

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

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

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

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

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

NOTE 1916 - SUBSEQUENT EVENTS

On ~~October 16, 2017,~~April 3, 2023, the Trust paid off a retail mortgage totaling $496. The property is unencumbered as of April 3, 2023.

On April 17, 2023, 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.~~March 31, 2023.

On May 5, 2023, the Trust paid off a residential mortgage totaling $3,185.

On May 5, 2023, the Trust obtained financing on a residential property for $5,000.

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

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

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All dollar amounts in this Form 10-Q in Part I Items 2. through 44. and Part II Items 2. are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

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

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

Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. ~~Such factors include, but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our business~~Please see “Note Regarding Forward-Looking Statements” 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.~~“Risk Factors” for more information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.

Overview

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

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

~~Operating Partnership~~

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

regular corporation. Our real estate portfolio consisted of ~~164~~185 properties containing ~~9,335~~11,300 apartment units and approximately ~~1,691,000~~1,498,000 square feet of leasable commercial space as of ~~September 30, 2017.~~March 31, 2023. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately ~~$648,856,~~$772,682, which includes construction in progress. ~~Effective January 1, 2016,~~ Sterling’s current acquisition strategy and focus is ~~solely~~ on multifamily apartment properties. ~~We currently have no plans~~

Critical Accounting Estimates

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

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

~~Table of Contents~~

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

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

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

~~Our Advisor~~

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

~~Conflicts of Interest~~

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

Impairment of Real Estate Investments

The Trust will review each property within its portfolio, every quarter for potential impairment through various ~~conflicts~~screening mechanisms (identifiers) to determine if there are indicators of ~~interest arising out~~impairment on a property. If so, the property is further analyzed through an undiscounted cash flow test. An identifier is not an indicator or triggering event for impairment; however, it is a mechanism to highlight an item on a property, which warrants further consideration and analysis to determine if an indicator is present. The following are examples of ~~our relationship with our trustees, executive officers, key personnel and our Advisor and its affiliates. Some~~activities that are review quarterly:

●

An individual property’s weighted average cost of capital is not meeting its required rate as calculated by management.

●

Significant decline in Operational NOI in relation to individual residential properties.

●

Significant decline in NOI in relation to individual commercial properties.

●

Significant quarter over quarter decrease in occupancy.

If the presence of ~~the conflicts of interest in our transactions with our Advisor and others are described below.~~

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

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

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

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provide evidence that an indicator of impairment does exist, the property is then subject to additional impairment analysis, and an undiscounted cash flow analysis is performed on the individual property. Indicators of impairment include:

~~Conflicts with Sterling’s business~~

●

Sustained reduction in cash flows/NOI that was not due to a planned action taken by the Company to improve long term operations and where discussion and review with the Portfolio management team cannot support a significant decline or insufficient NOI Coverage.

Additionally, Sterling considers certain occurrences at a property to be a triggering event, causing an analysis of impairment to occur, and ~~interests are most likely to arise from Leadership’s involvement in activities related to: (a) allocation~~an undiscounted cash flow analysis is performed. Triggering Events 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.impairment include:

●

Continued difficulty in leasing property or renewing existing leases. Factors considered include:

◾

Competitors building significantly newer properties.

◾

Competitors are relocating out of the area.

◾

Tenant downsizing and needing less square footage.

◾

Significant decrease in market prices not in line with general market trends.

◾

Property make-up of units is not in line with market trends.

◾

Demographics of property.

●

A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition.

●

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator.

●

A current expectation that, “more likely than not,” a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent. As such, any property approved by the Board of Trustees to be sold, will be evaluated for impairment.

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

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

~~Leadership may engage for their own account in business activities~~excess of the types conducted or to be conducted by Sterling or our subsidiaries. To the extent Leadership takes actions that are more favorable to other entities than to us, these actions could have a negative impact on Sterling’s financial performance and, consequently, on dividends to our shareholders and thecarrying value of ~~our stock.~~ the asset over its fair value for impairment of investment properties. Based on evaluation, there were no impairment losses during the three months ended March 31, 2023 and 2022.

~~Interests in Other Real Estate Programs~~

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

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

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

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

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

~~Table of Contents~~

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

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

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

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

~~Joint Ventures with Affiliates~~

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

~~Conflict Resolution~~

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

~~Critical Accounting Estimates~~

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

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 included elsewhere in this report.

~~Specific Achievements~~Acquisition of Real Estate Investments

The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing, and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.

REIT Status

We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains, as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to distribute to our shareholders 100% of our taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result.

Table of Contents

Principal Business Activity

Sterling currently directly owns 185 properties. The Trust’s 143 residential properties are located in North Dakota, Minnesota, Missouri, Nebraska, and Texas and are principally multifamily apartment buildings. The Trust owns 42 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, and medical properties. The Trust’s mix of properties is 78.8% residential and 21.2% commercial (based on cost) with a total carrying value of $772,682 at March 31, 2023. Currently our focus is limited to multifamily apartment properties. We will consider unsolicited offers for purchase of commercial properties on a case-by-case basis.

The following table represents the number of properties the Trust owns in each state as of March 31, 2023


Residential Property	Location	No. of Properties	Units
	North Dakota	122	7,187
	Minnesota	15	3,040
	Missouri	1	164
	Nebraska	4	639
	Texas	1	270
		143	11,300

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	20	772,000
	Arkansas	2	28,000
	Colorado	1	17,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	9	524,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		42	1,498,000

Results of Operations

Management Highlights

●

Increased revenues from rental operations by ~~$4,576~~$2,264 or ~~5.7%~~6.9% for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, compared to the same ~~nine month period~~three month-period in ~~2016.~~

2022.

●

Acquired a total of ten 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.

~~Table of Contents~~

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

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

Declared and paid dividends aggregating ~~$0.7425~~$0.2875 per common share for the ~~first nine~~three months ~~of 2017.~~

ending March 31, 2023.

Table of Contents

Results of Operations for the Three Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022


	Three months ended March 31, 2023						Three months ended March 31, 2022
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	29,920	$	5,260	$	35,180	$	27,494	$	5,422	$	32,916
Real Estate Expenses
Real Estate Taxes		3,239		560		3,799		2,846		651		3,497
Property Management		3,875		205		4,080		3,443		203		3,646
Utilities		3,886		326		4,212		3,409		360		3,769
Repairs and Maintenance		8,161		604		8,765		5,974		433		6,407
Insurance		1,042		23		1,065		836		31		867
Total Real Estate Expenses		20,203		1,718		21,921		16,508		1,678		18,186
Net Operating Income	$	9,717	$	3,542		13,259	$	10,986	$	3,744		14,730
Interest						5,355						4,845
Depreciation and amortization						6,552						5,782
Administration of REIT						1,311						1,217
Other income						729						(503)
Net (loss) Income					$	(688)					$	3,389

Net (Loss) Income Attributed to:
Noncontrolling Interest					$	(448)					$	2,175
Sterling Real Estate Trust					$	(240)					$	1,214
Dividends per share⁽¹⁾					$	0.2875					$	0.2875
Earnings per share					$	(0.0200)					$	0.1200
Weighted average number of common shares						10,952						10,465

Three months ended  September 30, 2017

Three months ended  September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)


(in thousands)

(in thousands)
Real Estate Revenues

$
21,863

$
6,792

$
28,655

$
20,081

$
6,807

$
26,888
Real Estate Expenses

Real Estate Taxes

2,404

782

3,186

1,726

634

2,360
Property Management Fees

2,933

204

3,137

2,519

252

2,771
Utilities

1,534

384

1,918

1,321

388

1,709
Repairs and Maintenance

5,539

631

6,170

5,663

625

6,288
Insurance

354

22

376

318

21

339
Total Real Estate Expenses

12,764

2,023

14,787

11,547

1,920

13,467
Net Operating Income

$
9,099

$
4,769

13,868

$
8,534

$
4,887

13,421
Interest

4,690

4,636
Depreciation and amortization

5,427

5,471
Administration of REIT

885

1,136
Loss on lease terminations

—

25
Other (income)/expense

(390)

(370)
Net Income

$
3,256

$
2,523

Net Income Attributed to:

Noncontrolling Interest

$
2,174

$
1,638
Sterling Real Estate Trust

$
1,082

$
885
Dividends per share (1)

$
0.2475

$
0.2400
Earnings per share

$
0.13

$
0.11
Weighted average number of common shares

8,356

7,891

(1)

~~(1)~~

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

Revenues

Property revenues of ~~$28,655~~$35,180 for the three months ended ~~September 30, 2017~~March 31, 2023 increased ~~$1,767~~$2,264 or ~~6.6%~~6.9% in comparison to the same period in ~~2016.~~2022. Residential property revenues increased ~~$1,782~~$2,426 and commercial property revenues decreased ~~$ (15).~~$162.

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


	March 31,		March 31,
	2023		2022
Residential occupancy	90.4	%	94.1	%
Commercial occupancy	88.4	%	74.8	%

September 30,

September 30,

2017

2016

Residential occupancy

94.1
%
94.2
%
Commercial occupancy

95.7
%
95.9
%

Table of Contents

Residential revenues for the three months ended ~~September 30, 2017~~March 31, 2023 increased ~~$1,782~~$2,426 or 8.8% in comparison to the same period for ~~2016.~~2022. Residential properties acquired since January 1, ~~2016~~2022 contributed approximately ~~$1,563~~$1,902 to the increase in total residential revenues infor the three months ended ~~September 30, 2017. Rental income from residential properties~~

~~Table of Contents~~

~~owned for more than one year~~March 31, 2023. The remaining increase is due to increased ~~approximately $219 in comparison to the same period in 2016.~~rent charges at our stabilized properties. Residential revenues comprised ~~76.3%~~85.0% of total revenues for the three months ended ~~September 30, 2017~~March 31, 2023 compared to ~~74.7%~~83.5% of total revenues for the three months ended ~~September 30, 2016.~~March 31, 2022. The residential occupancy rates for the three months ended ~~September 30, 2017 were comparable~~March 31, 2023 decreased 3.7% primarily due to ~~September 30, 2016.~~increased vacancy.

For the three months ended ~~September 30, 2017~~March 31, 2023, total commercial revenues decreased ~~$15~~$162 or 3.0% in comparison to the same period for ~~2016. Revenues from commercial properties acquired since January 1, 2016, contributed approximately $2~~2022. The decrease was primarily attributed to the ~~decrease~~disposition of one commercial real estate investment in ~~total~~2022. This property accounts for $33 of decreased commercial ~~revenues in~~rent during the three months ended ~~September 30, 2017. Rental income from~~March 31, 2023. Increased vacancy in the Minneapolis market accounts for $35 of decreased commercial ~~properties owned for more than one year decreased approximately $13 in comparison to the same period in 2016. The~~revenue, along with a decrease in ~~revenues was primarily~~total miscellaneous income for $59. This is attributed to ~~decreases~~an early term fee in ~~straight-line rent adjustments and~~ the sale of the Fargo retail property. Commercial revenues comprised 23.7% of the total revenues for the three months ended September 30, 2017 compared to 25.3% of total revenues for the three months ended September 30, 2016.Minneapolis Market in 2022. The commercial occupancy rates for the three months ended ~~September 30, 2017 are comparable~~March 31, 2023 decreased 17.1% primarily due to office spaces located in the ~~three months ended September 30, 2016.~~Minnesota market.

Expenses

Residential expenses from operations of ~~$12,764~~$20,203 during the three months ended ~~September 30, 2017~~March 31, 2023 increased ~~$1,217~~$3,695 or 22.4% in comparison to the same period in 2022. The increase is attributed to an increase in repairs and maintenance expense of $2,187 or 36.6%. Properties acquired since January 1, 2022 attributed $287 to the increase in repairs and maintenance expense. Additionally, increased project and upgrade costs, which are considered to be deferred maintenance costs from the year ended 2020 and 2021, due to COVID-19 restrictions attribute to the increase in repairs and maintenance expense during the three months ended March 31, 2023. The increase is also attributed to an increase in utility expense of $477 or 14.0% as well as an increase in property management expense of $430 or 12.5%. The main reason for the increases in utility and property management expenses is related to the properties acquired since January 1, 2022, which account for $204 and $275 of the increase, respectively.

Commercial expenses from operations of $1,718 during the three months ended March 31, 2023 increased $40 or 2.4% in comparison to the same period in 2022. The increase in overall expenses is attributed to repairs and maintenance expenses during the three months ended March 31, 2023 Repairs and maintenance increased by $171 in comparison to the same period in 2022, This attributes to high costs in HVAC repairs and higher snow removal costs. These costs are offset by a decrease in utilities and property tax for $125 for the three months ended March 31, 2023 in comparison to the same period in 2022.

Interest expense of $5,355 during the three months ended March 31, 2023 increased $510 or 10.5% in comparison to the same period in ~~2016. This increase was attributed~~2022. Interest expenses related to ~~the increase in number of residential properties owned~~financing activities increased by $405 during the three months ended ~~September 30, 2017 versus~~March 31, 2023 as compared to the same period in ~~2016. In addition, overall increases in operating expenses including property management fees~~2022. Interest expense notes payable 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.

~~Commercial expenses from operations of $2,023~~$72 during the three months ended ~~September 30, 2017 increased $103 or 5.4% in comparison~~March 31, 2023 due to the ~~same period in 2016. The increase~~payoff of the Bell Bank promissory note acquired at the end of 2022. During the three months ended March 31, 2023 interest expense was ~~primarily attributed to increases in real estate taxes for one Bloomington, Minnesota office property~~15.2% of total revenues.

Depreciation and ~~North Dakota properties.~~

~~Interest~~amortization expense of ~~$4,690~~$6,552 during the three months ended ~~September 30, 2017~~March 31, 2023 increased ~~$54 in comparison~~$770 or 13.3%. Properties acquired since January 1, 2022, contributed approximately $598 to the ~~same period~~increase in 2016 due to increased levels of debt outstanding (an aggregate increase of $8,357). Interest expense was approximately 16.4% and 17.2% of rental income for the three months ended September 30, 2017 and 2016, respectively.

Depreciation and amortization expense decreased 0.8% from $5,471 for the three months ended September 30, 2016 to $5,427 for the three months ended September 30, 2017. The $44 net decrease was primarily a result of a $236 decrease in amortization related to lease intangibles that are fully amortized.depreciation expense. Amortization expense will continue to decrease as lease intangibles become fully ~~amortized.~~

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

~~Net Operating Income~~

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

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

~~Table of Contents~~

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

~~Net Income~~

Net income for the three months ended September 30, 2017 was $3,256 compared to $2,523 for the three months ended September 30, 2016. The increase was primarily attributed to an increase of $447 in net operating income and a decrease of $299 in acquisition fees. There were no acquisition fees expensed in the three months ended September 30, 2017 due to the Company’s early adoption of ASU 2017-01 as of July 1, 2017.

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

Nine months ended September 30, 2017

Nine months ended September 30, 2016


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)

(in thousands)

(in thousands)
Real Estate Revenues

$
64,579

$
20,619

$
85,198

$
59,990

$
20,632

$
80,622
Real Estate Expenses

Real Estate Taxes

6,168

2,221

8,389

5,144

1,876

7,020
Property Management Fees

8,527

636

9,163

7,428

667

8,095
Utilities

5,399

1,064

6,463

4,695

1,020

5,715
Repairs and Maintenance

14,493

1,610

16,103

14,118

1,585

15,703
Insurance

1,043

69

1,112

968

54

1,022
Total Real Estate Expenses

35,630

5,600

41,230

32,353

5,202

37,555
Net Operating Income

$
28,949

$
15,019

43,968

$
27,637

$
15,430

43,067
Interest

13,938

13,740
Depreciation and amortization

16,170

16,711
Administration of REIT

4,208

4,187
Loss on lease terminations

146

299
Other (income)/expense

(5,240)

(473)
Net Income

$
14,746

$
8,603

Net Income Attributed to:

Noncontrolling Interest

$
9,925

$
5,607
Sterling Real Estate Trust

$
4,821

$
2,996
Dividends per share (1)

$
0.7425

$
0.7200
Earnings per share

$
0.5900

$
0.3800
Weighted average number of common shares

8,234

7,791

~~(1)~~

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

~~Revenues~~

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

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

September 30,

September 30,

2017

2016

Residential occupancy

94.9
%
95.2
%
Commercial occupancy

96.7
%
95.6
%

~~Table of Contents~~

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

For the nine months ended September 30, 2017, total commercial revenues decreased $(13) in comparison to the same period for 2016. Commercial properties acquired since January 1, 2016, contributed approximately $41 to the increase in total commercial revenues in the nine months ended September 30, 2017. Rental income from commercial properties owned for more than one year decreased approximately $54 in comparison to the nine months ended September 30, 2016. The decrease was primarily attributed to the sale of a retail property in June 2017 which contributed to nine months of revenues in 2016 but only six months of revenue in 2017. Commercial revenues comprised 24.2% of the total revenues for the nine months ended September 30, 2017 compared to 25.6% of total revenues for the nine months ended September 30, 2016. The commercial occupancy rates for the nine months ended September 30, 2017 increased 1.1% primarily due to lease up at two properties including a Fargo retail property and Minot office property.

~~Expenses~~

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

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

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

Depreciation and amortization expense decreased 3.2% from $16,711 for the nine months ended September 30, 2016 to approximately $16,170 for the nine months ended September 30, 2017. The $541 decrease was primarily a result of a $929 decrease in amortization related to lease intangibles that are fully amortized. Amortization expense will continue to decrease as lease intangibles become fully amortized.intangible assets. Depreciation and amortization expense as a percentage of rental income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 was ~~relatively consistent at 19.0%~~18.6% and ~~20.7%~~17.6%, respectively.

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

REIT administration expenses ~~increased from $4,187 for~~of $1,311 during the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2023 increased $94 or 7.7% compared to ~~$4,208 for~~ the ~~nine months ended September 30, 2017~~ ~~due~~same period in 2022. The increase is attributable to an increase in ~~portfolio assets in 2017~~the amount of audit fees and the REIT advisory fee.

Other (loss) income of $(728) for the three months ended March 31, 2023 decreased $1,232 or 245.0% in comparison to the same period in ~~2016.~~

~~Table of Contents~~

~~Net Operating Income~~

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI2022. The decrease 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% for the nine months ended September 30, 2017 in comparison to the same nine month period in 2016 due primarily to a $4,589 increase in revenues. Commercial NOI decreased $411 or 2.7% for the nine months ended September 30, 2017 in comparison to the same nine month period in 2016 due primarily attributed to decreased revenues due to the sale of a retail property in June 2017 and a medical property in April 2016 and increased real estate taxes for one Bloomington, Minnesota office property and North Dakota properties.

~~Net Income~~

~~Net income for the nine months ended September 30, 2017was $14,746 compared to $8,603 for the nine months ended September 30, 2016. The increase in net income is primarily attributed to a $2,049 net gain~~realized gains on the sale of real estate investments of $1,329 in 2022.

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Construction in Progress and ~~non-real estate investments~~Development Projects

The Trust capitalizes direct and ~~a $2,186 gain on~~certain indirect project costs incurred during the ~~change in control over~~development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate ~~investments.~~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.

~~Property Acquisitions~~Construction in progress as of March 31, 2023, consists primarily of construction at several residential properties located in North Dakota and ~~Dispositions~~

~~Property Acquisitions~~Minnesota. The Prairiewood Meadows construction consists of the re-development of one building due to a fire, a new clubhouse for residents, and ~~Dispositions during~~parking lot repairs. The re-development of one building due to a fire was completed in the ~~nine months ended September 30, 2017~~

~~We acquired ten properties for a total~~first quarter of ~~$20,111 during the nine months ended September 30, 2017. Total consideration~~2023, and current expectations 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 $72clubhouse 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 $2,186parking lot will be completed in the second quarter of ~~2017 as~~2023. The current budget is approximately $1,200 of which $704 has been incurred and is included in construction in progress. The Rosedale Estates project is primarily related to a ~~result of remeasuring~~new parking structure. Current expectations are the ~~carrying value to fair value.~~

~~During the nine months ended September 30, 2017, the operating partnership sold a retail property 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 units of the operating partnership, new loans of $2,662, assumed liabilities of $78 and cash of $7,352.

During the nine months ended September 30, 2016, the operating partnership sold a medical property in Eau Claire, Wisconsin for approximately $1,400 and recognized a loss of $316. The property sale was pursuant to an option exerciseproject will be completed in the ~~tenant’s lease.~~first quarter of 2024, and the current budget is approximately $5,189 of which $256 has been incurred and is included in construction in progress. Remaining construction in progress projects are primarily related to building and roof system, roof replacements on multiple residential properties, residential exterior window systems, and new deck systems on multiple residential properties.

~~See Notes 17~~The Trust has two on-going developments through ventures in unconsolidated affiliates.

Park Hill Apartments, currently being developed in Dallas, Texas, is expected to be completed in the third quarter of 2023 and 18the current project budget approximates $53,138 of which $42,755 has been incurred as of March 31, 2023.

Kessler Apartments, currently being developed in Fort Worth, Texas, is expected to be completed in the ~~Consolidated Financial Statements included above for more information regarding our acquisitions~~third quarter of 2024 and ~~dispositions during~~ the ~~nine months ended September 30, 2017 and 2016.~~current project budget approximates $55,000 of which $18,357 has been incurred as March 31, 2023.

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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 definition32

Table 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.Contents

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~~need or its ability to service indebtedness or to pay dividends to shareholders.

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The following tables include calculations of FFO and ~~MFFO, and~~ the reconciliations to net income, ~~for~~ the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, respectively. We believe these calculations are the most comparable GAAP financial ~~measure (in thousands):~~measure:

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

Three months ended  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.~~

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.~~


	Three months ended March 31, 2023			Three months ended March 31, 2022
			Weighted Avg			Weighted Avg
			Shares and			Shares and
	Amount		Units	Amount		Units

	(unaudited)
	(in thousands, except per share data)
Net (Loss) Income attributable to Sterling Real Estate Trust	$	(240)	10,952	$	1,214	10,465

Add back:
Noncontrolling Interest - Operating Partnership Units		(408)	18,696		2,145	18,495
Depreciation & Amortization from continuing operations		6,552			5,782
Pro rata share of unconsolidated affiliate depreciation and amortization		1,484			1,089
Loss on impairment of real estate investments		—			—
Subtract:
Gain on sale of depreciable real estate		—			(1,329)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	7,388	29,648	$	8,901	28,960

~~Table of Contents~~

Liquidity and Capital Resources

Evaluation of Liquidity

Wecontinually 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, the credit quality of tenants, and current lease terms and projected expiration dates.

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

At March 31, 2023, our unrestricted cash resources consisted of cash and cash equivalents totaling approximately $12,064. 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 $51,888, which could potentially be used as collateral to secure additional financing in future periods.

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The Trust has 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 March 31, 2023, the Bremer lines of credit secured two letters of credit totaling $50, leaving $9,865 available and unused under the agreements. The Trust anticipates it will hold it as a cash resource to the Trust.

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 three months ended March 31, 2023, we did not sell any common shares in private placements. During the three months ended March 31, 2023, we issued 90,000 and 56,000 common shares under the dividend reinvestment plan and optional share purchases, respectively, which raised gross proceeds of $3,253. During the three months ended March 31, 2022, we did not sell any common shares in private placements. During the three months ended March 31, 2022, we issued 79,000 and 57,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively, which raised gross proceeds of $3,029.

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. No limited partnership units of the Operating Partnership were issued in relation to the acquisition of real estate investments the three months ended March 31, 2023. During the three months ended March 31, 2022, the Trust issued approximately 443,000 limited partnership units of the Operating Partnership valued at $23.00 per unit for an aggregate consideration of approximately $10,180 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.

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

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

~~Evaluation~~34

Table of ~~Liquidity~~Contents

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

Credit Quality of Tenants

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

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

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

Lease Expirations and Occupancy

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

Cash Flow Analysis

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

~~Table of Contents~~

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

Nine Months Ended

September 30,

2017

2016

(in thousands)
Net cash flows provided by operating activities

$
27,718

$
26,799
Net cash flows used in investing activities

$
(10,650)

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

$
(8,111)

$
(3,966)


	Three months ended
	March 31,
	2023		2022

	(in thousands)
Net cash flows provided by operating activities	$	4,474	$	7,457
Net cash flows provided by (used in) investing activities	$	14,644	$	(10,187)
Net cash flows (used in) provided by financing activities	$	(10,389)	$	3,567

Operating Activities

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

Net cash provided by operating activities was ~~$27,718~~$4,474 and ~~$26,799 for~~$7,457 the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, 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~~

Table of ~~our real estate portfolio.~~Contents

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.

Net cash provided by investing activities was $14,644 and used in investing activities was ~~$10,650 and $13,129~~$10,187 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, cash flows used in investing activities related ~~primarily~~ to the acquisition of properties and capital expenditures was ~~$12,840~~$1,782 and ~~$14,870, respectively,~~$7,295, respectively. Cash outlays related to investments in unconsolidated affiliates was $2,261 and ~~the changes in restricted cash for replacement reserve escrows was $ (952) and $ (819), respectively. In addition,~~$6,444 during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, there were proceeds ~~of $4,442 were generated~~ from the ~~sale~~maturity of ~~one commercial retail property and~~securities for $19,369. There were no proceeds from the ~~sale~~maturity of ~~vehicles. The~~securities for the three months ended March 31, 2022. During the three months ended March 31, 2023, there were no proceeds from the sale of ~~the commercial retail property~~real estate investments. Proceeds from sale of ~~$4,278 were deposited into a 1031 exchange escrow at June 30, 2017 and used on July 3, 2017. In addition,~~real estate investments during the ~~nine~~three months ended ~~September 30, 2017, proceeds of $1,937 were received from involuntary conversions. The majority of the proceeds were related to one property that~~March 31, 2022 was damaged in 2016. During the nine months ended September 30, 2016, proceeds of $1,404 were generated from the sale of one commercial medical property and the sale of one vehicle. In addition, during the nine months ended September 30, 2016, proceeds of $915 were received from involuntary conversions.$2,622.

Financing Activities

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

Net cash used in financing activities was ~~$8,111~~$10,389 and ~~$3,966~~provided by financing activities was $3,567 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016, respectively.~~2022. During the ~~nine~~three months ended ~~September 30, 2017,~~ March 31, 2023, we paid ~~$15,195~~$6,531 in dividends and distributions, redeemed ~~$1,530~~$1,096 of shares and units, received proceeds of $30,250 from new mortgage notes, ~~payable of $23,916,~~ and made mortgage principal payments of ~~$16,632.~~$6,637. For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2022, we paid ~~$13,126~~$5,851 in dividends and distributions, redeemed ~~$1,765~~$736 of shares and units, received proceeds of $12,867 from new mortgage notes, ~~payable of $20,271,~~ and made mortgage principal payments of ~~$9,857.~~$3,931.

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Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, ~~2017~~2023 to ~~September 30, 2017~~March 31, 2023 totaling ~~$6,111~~$3,147 or ~~$0.7425~~$0.2875 per share, ~~including amounts reinvested through the dividend reinvestment plan. During the nine months ended September 30, 2017, we paid~~of which $1,151 were cash dividends ~~of $2,201~~ and ~~dividends of $3,910~~$1,996 were reinvested under the dividend reinvestment plan. The cash dividends were paid ~~with~~from the ~~$27,718~~$4,474 from our cash flows from ~~operations and $743 provided by distributions from unconsolidated affiliates.~~operations.

We declared cash dividends to our shareholders during the period from January 1, ~~2016~~2022 to ~~September 30, 2016~~March 31, 2022 totaling ~~$5,606~~$3,007 or ~~$0.7200~~$0.2875 per share, ~~including amounts reinvested through the dividend reinvestment plan. During the nine months ended September 30, 2016, we paid~~of which $1,130 were cash dividends ~~of $1,983~~ and ~~dividends of $3,623~~$1,877 were reinvested under the dividend reinvestment plan. The cash dividends were paid ~~with~~from the ~~$26,799~~$7,457 from our cash flows from ~~operations and $325 provided by distributions from unconsolidated affiliates.~~operations.

We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate ~~these~~ cash ~~flows~~ 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.

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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


	Three months ended
	March 31,
	2023		2022

	(in thousands)
Cash flows provided by operations (net (loss) income of $(688) and $3,389, respectively)	$	4,474	$	7,457
Distributions in excess of earnings received from unconsolidated affiliates		659		105
Gain on sales of real estate and non-real estate investments		—		1,329
Dividends declared		(3,147)		(3,007)
Excess	$	1,986	$	5,884

Limited Partnership Units

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

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, we declared quarterly distributions ~~totalling $12,909~~totaling $5,373 to holders of limited partnership units in our ~~operating partnership,~~Operating Partnership, which we paid on April 17, ~~July 17, and October 16, 2017.~~2023. 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~~three months ended ~~September 30, 2016,~~March 31, 2022, we declared quarterly distributions ~~totalling $11,546~~totaling $5,359 to holders of limited partnership units in our ~~operating partnership,~~Operating Partnership, which we paid on April 15, ~~July 15, and October 17, 2016.~~2022. Distributions were paid at a rate of ~~$0.2400~~$0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

~~Table of Contents~~

Sources of Dividends and Distributions

For the ~~nine~~three months ended ~~September 30, 2017, we paid~~March 31, 2023, aggregate dividends and distributions of ~~$6,111, which were paid~~$8,520, are funded with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was ~~$27,165 while our modified funds from operations, or MFFO,~~$7,388 for the ~~nine~~three months ended ~~September 30, 2017 was $28,540;~~March 31, 2022; therefore, we believe our ~~management believes our~~dividend and distribution policy is sustainable over time. For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2022, we paid aggregate dividends and distributions of ~~$5,606 which were paid~~$8,366 with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was ~~$26,487 while our MFFO,~~$8,901 as of the ~~nine~~three months ended ~~September 30, 2016 was $28,013.~~March 31, 2022. 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~~RecentlyIssuedAccountingPronouncements

~~At September 30, 2017, our cash resources consisted~~For a discussion of ~~cash~~recently issued accounting pronouncements, see Note 2, Principal Activity 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~~Significant Accounting Policies— Recently Issued Accounting Pronouncements, to the ~~accompanying~~ consolidated financial statements ~~for additional details regarding our line~~that are a part of ~~credit agreements.~~this Annual Report on Form 10-Q.

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

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

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

~~Off-Balance Sheet Arrangements~~

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

~~Inflation~~

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

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

~~Table of Contents~~

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

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

The Trust is exposed to certain risk arising from both its business operations and economic conditions and principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Trust manages economic risks, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities. The principal material financial market risk to which we are exposed, is interest-rate risk, which the Trust manages through the use of derivative financial instruments. Specifically, the Trust enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. During the three months ended March 31, 2023, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. ~~Our~~These swaps have an aggregated notional amount of $105,340 the three months ended March 31, 2023. 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.

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As of March 31, 2023, the Trust had $105,340 of variable-rate borrowings, with the total outstanding balance fixed through interest rate swaps. Even though our goal is to maintain a fairly low exposure to ~~market~~interest rate risk, ~~for changes~~we may become vulnerable to significant fluctuations in interest rates ~~relates primarily to~~on any future repricing or refinancing ~~long-term~~of our fixed ~~rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our~~or variable rate ~~lines of credit.~~debt or future debt.

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

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

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief ~~Accounting~~Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief ~~Accounting~~Financial Officer have concluded that, as of ~~September 30, 2017,~~March 31, 2023, 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~~first fiscal quarter of ~~2017~~ 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Table of Contents~~

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 or results of operation.

Item 1A. Risk Factors.

We maintain our cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceeds the FDIC insurance coverage of $250,000, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. We do not have any bank accounts, loans from, or any other amounts due to or from any recently failed financial institution, nor have we experienced any losses to date on our cash and cash equivalents held in bank accounts. However, there is no assurance that financial institutions in which we hold our cash and cash equivalents will not fail, in which case we may be subject to a risk of loss or delay in accessing all or a portion of our funds exceeding the FDIC insurance coverage, which could adversely impact our short-term liquidity, ability to operating our business, and financial performance.

Other than as described above, 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, 2022.

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

Sale of Securities

Neither Sterling nor the ~~operating partnership~~Operating Partnership issued any unregistered securities during the three months ended ~~September 30, 2017.~~March 31, 2023.

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Other Sales

During the three months ended ~~September 30, 2017, there were no~~March 31, 2023, we did not issue any common shares in exchange for limited partnership units of the ~~operating partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Section 4(2) and Rule 506~~Operating Partnership.

Table of ~~Regulation D.~~Contents

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

March 31, 2023:


			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
January 1-31, 2023	2,000	28,000	$	21.85	1,499,000	1,181,000	$	14,022
February 1-29, 2023	—	1,000	$	21.85	1,499,000	1,182,000	$	13,993
March 1-31, 2023	6,000	12,000	$	21.85	1,505,000	1,194,000	$	13,587
Total	8,000	41,000

For the three months ended ~~September 30, 2017, we~~March 31, 2023, the Trust redeemed all shares or units for which we received redemption requests. In addition, for the three months ended ~~September 30, 2017,~~March 31, 2023, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan, effective January 1, 2022, permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our ~~operating partnership,~~Operating Partnership, up to a maximum 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 March 31, 2023, was $13,587. The redemption price for such shares and units redeemed under the plan was fixed at ~~$15.00~~$21.85 per share or unit, which ~~was increased to $15.50~~became effective ~~March 29, 2017 and is the current redemption price.~~January 1, 2022. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend, or suspend the redemption plan at any time if it determines to do so is in our best interest.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

5140

Table of Contents

Item 6. Exhibits.

~~Item 6. Exhibits.~~


Exhibit
Number		Title of Document

10.1		Twelfth Amended and Restated Advisory Agreement, effective April 1, 2023 (incorporated by reference to Exhibit No. 10.1 to the Trust’s current report on Form 8-K filed March 23, 2023).

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

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

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

101		The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2023, formatted in ~~XBRL (eXtensible~~iXBRL (Inline iXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016;~~2022; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016;~~2022; (iii) Consolidated ~~Statement~~Statements of Shareholders’ Equity for ~~nine~~three months ended ~~September 30, 2017;~~March 31, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, and; (v) Notes to Consolidated Financial Statements.
104		Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

5241

Table of Contents

SIGNATURES

~~SIGNATURES~~

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

Dated:~~November 8, 2017~~May 10, 2023

	STERLING REAL ESTATE TRUST

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

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

5342

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

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


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



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


Class		Outstanding at ~~November 6, 2017~~May 8, 2023
Common Shares of Beneficial Interest, $0.01 par value per share		~~8,516,368~~11,043,189

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~ 2022	3
Consolidated Statements of Operations and Other Comprehensive (Loss) Income – Three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~ 2022	4
Consolidated ~~Statement~~Statements of Shareholders’ Equity – ~~Nine~~Three months ended ~~September 30, 2017~~March 31, 2023 and 2022	5
Consolidated Statements of Cash Flows – ~~Nine~~Three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~ 2022	6
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50 37
Item 4. Controls and Procedures	50 38

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51 38
Item 6. Exhibits	52 41
Signatures	53 42


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

Total Assets	$	700,782	$	670,513

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

COMMITMENTS and CONTINGENCIES - Note 16

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

	$	700,782	$	670,513


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

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

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


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

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


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

	(in thousands)
BALANCE AT DECEMBER 31, 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


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


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

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


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


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


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


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


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


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


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

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


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