Sterling Real Estate Trust 10K 2022 Annual report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-54295

Sterling Real Estate Trust

d/b/a Sterling Multifamily Trust

(Exact name of registrant as specified in its charter)



North Dakota		90-0115411
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4340 18^th Ave South Ste. 200 Fargo, North Dakota		58103
(Address of principal executive offices)		(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

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


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

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ◻ Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ◻ Yes ☑ No

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

Indicate by checkmark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). ☑ Yes ◻ No

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☐
Emerging growth company	☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

There is no established public market for the registrant’s shares of common stock.

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


Class		Outstanding at March 14, 2023
Common Shares of Beneficial Interest, $0.01 par value per share		10,947,790

Documents Incorporated by Reference: Portions of Sterling’s Proxy Statement for its 2023 Annual Meeting of Shareholders, which Sterling intends to file with the Securities and Exchange Commission within 120 days after the end of Sterling’s fiscal year ended December 31, 2022, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K to the extent described herein. If Sterling does not file its Proxy Statement on or before 120 days after the end of its 2022 fiscal year, Sterling will file the required information in an amendment to this Annual Report on Form 10-K.

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Sterling Real Estate Trust

INDEX


	PAGE
PART I
Item 1. Business		3
Item 1A. Risk Factors		8
Item 1B. Unresolved Staff Comments		24
Item 2. Properties		24
Item 3. Legal Proceedings		30
Item 4. Mine Safety Disclosures		30
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		30
Item 6. Selected Financial Data		32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		45
Item 8. Financial Statements and Supplementary Data		45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		45
Item 9A. Controls and Procedures		45
Item 9B. Other Information		47
PART III
Item 10. Trustees, Executive Officers and Corporate Governance		47
Item 11. Executive Compensation		47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		47
Item 13. Certain Relationships and Related Transactions, and Trustee Independence		47
Item 14. Principal Accountant Fees and Services		47
PART IV
Item 15. Exhibits and Financial Statement Schedules		48
Item 16. Form 10-K Summary		48
Report of Independent Registered Public Accounting Firm and Financial Statements		51
Signatures		94

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements regarding our plans and objectives, including, among other things, our future financial condition, anticipated capital expenditures, anticipated dividends and other matters. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.

The forward-looking statements included herein are based on our current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure readers that the forward-looking statements included in this filing will prove to be accurate. The accompanying information contained in this Annual Report on Form 10-K, including, without limitation, the information set forth under the section entitled “Risk Factors” in Item 1A, identifies important additional factors that could materially adversely affect actual results and performance. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of certain unanticipated events or changes to future operating results.

PART I

All dollar amounts in this Form 10-K are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

ITEM 1. BUSINESS

GENERAL

Sterling Real Estate Trust (“we,” “us,” “our,” “Company,” “Trust” or “Sterling”) is a real estate investment trust (“REIT”). Sterling was registered in North Dakota as an unincorporated business trust in December 2002. References in this Annual Report on Form 10-K to the “Company,” “Sterling,” “Trust,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our dividends and other factors. As of December 31, 2022, we owned directly or through our operating partnership, 185 properties in 12 states.

UPREIT Structure

The Trust operates as an Umbrella Partnership Real Estate Investment Trust, which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, the Trust conducts substantially all investment activities and holds substantially all of the Trust’s assets through the operating partnership Sterling Properties, LLLP. The Trust controls the operating partnership as the general partner and owns approximately 36.60% of the operating partnership as of December 31, 2022. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, the proportionate shares of the assets and income of the operating partnership are deemed to be the assets and income of the Trust.

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The UPREIT structure is used to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the property 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, the Trust may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in the operating partnership, rather than directly in the Trust, 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, the structure provides the Trust 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 the Trust’s shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.

Operating Partnership

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

Since formation, the Trust’s focus has consisted of owning and operating income-producing real estate properties. In 2006, the Trust held 23 total properties approximating $56,265 in total assets, in the operating partnership. Between 2007 and 2022, the Trust focused extensively on strengthening the multifamily component of the portfolio, acquiring properties directly or through UPREIT transactions. A majority of these multifamily properties are located in North Dakota. The portfolio has grown to 185 properties, approximating $888,723 in total assets, and book equity, including noncontrolling interests, of approximately $323,466 as of December 31, 2022. As of December 31, 2022, the portfolio contained approximately 11,300 apartment units and 1,498,000 square feet of leasable commercial space.

OUR PEOPLE

We do not have any employees. Instead, we rely on our external Advisor to conduct our day-to-day affairs.

Advisor to the Trust

Sterling Management, LLC, a North Dakota limited liability company formed in November 2002, is the external Advisor to the Trust. The Advisor is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf. The Advisor is 100% owned by Trustmark Enterprises, Inc., formerly known as Alloy, a North Dakota corporation (“Trustmark”). Trustmark is owned in part by Kenneth P. Regan, a Trustee and Chief Executive Officer of the Trust, by James S. Wieland, also a Trustee of the Trust, by Joel S. Thomsen, President of the Trust. In addition, Messrs. Regan, Wieland, Thomsen and Gleave serve on the Advisor’s Board of Governors. The Advisor’s employee base has seen considerable growth, both in number and expertise, since its inception.

Audit and Disclosure Committee

The Audit and Disclosure Committee was established by the Board of Trustees to assist the Board in fulfilling its fiduciary duties and oversight responsibilities. The Audit and Disclosure Committee assists the Board by overseeing the integrity of the Trust’s financial statements, financial reporting and disclosure processes, internal accounting and financial controls and the annual independent audit of the Trust’s financial statements. The Audit and Disclosure Committee also oversees the establishment and maintenance of processes to assure the Trust’s compliance with all applicable laws, regulations, and Trust policy, including compliance with filing requirements under the Exchange Act and the rules and regulations promulgated thereunder. In performing its work, it is the Audit and Disclosure Committee’s responsibility to foster free and open means of communication between the Trustees, the independent auditors and the Trust’s financial managers. Our Audit and Disclosure Committee is currently comprised of Trustees Timothy A. Hunt (Chair of the Committee), Ann L. Christenson, Timothy L. Haugen, Michelle L. Korsmo, and Mark T. Polovitz.

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Board of Trustees and Executive Officers

The Trust operates under the direction of our Board of Trustees, the members of which are accountable to both the Trust and its shareholders. The Trustees are elected annually by our shareholders. In addition, the Board has a duty to supervise our relationship with the Advisor and evaluate the performance of and fees paid to the Advisor on an annual basis. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on March 24, 2022, effective April 1, 2022 until March 31, 2023. The Board of Trustees has provided investment guidance for the Advisor to follow and must approve each investment recommended by the Advisor. Currently, the Advisor has eight members on the Board, six of whom are independent.

Although the Trust has executive officers, it does not have any paid employees. The President, Chief Executive Officer, Chief Investment Officer, Chief Financial Officer and Treasurer, and General Counsel and Secretary of the Trust, are also officers, employees, owners, or governors of our Advisor. Among others, such executive officers oversee the Advisor’s day-to-day operations with respect to the Trust. However, when doing so, such executive officers are acting on behalf of the Advisor in performing the Advisor’s obligations under the Advisory Agreement. Generally, the only services performed by the Trust’s executive officers are those required by law or regulation, such as executing documents as required by North Dakota law and providing certifications required by the federal securities laws.

Organizational Structure

On January 1, 2021, the advisor was acquired by Trustmark Enterprises, Inc. in an equity transfer.

The following chart shows the relationship structure with the advisor:

(1)

As of December 31, 2022, the Advisor was owned 100% by Trustmark Enterprises, Inc. Trustmark was owned in part by the Trust’s Chief Executive Officer and Trustee Kenneth P. Regan (36.23%), by Trustee James S. Wieland (25.15%), by President Joel S. Thomsen (20.00%). Messrs. Regan and Thomsen, serve as officers of the Advisor. Messrs. Regan, Wieland, and Thomsen, serve on the Advisor’s Board of Governors.

(2)	Sterling Management, LLC serves as Advisor to both the Trust and the operating partnership. The Advisor does not own any of our shares. Messrs. Regan and Wieland beneficially own approximately 1.43% and 2.76%, respectively, of our shares as of December 31, 2022.

(3)

The Trust controls the operating partnership as the general partner and owns approximately 36.60% of the operating partnership as of December 31, 2022. Messrs. Regan and Wieland beneficially owned and had voting power over approximately 16.41% and 5.12%, respectively, of the Operating Partnership as of December 31, 2022.

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CORE INVESTMENT OBJECTIVES AND STRATEGY

Investment Objectives

The Trust’s primary investment objectives are to:

●

Acquire quality real estate properties or interests in real estate properties that can provide stable cash flow for distribution to our shareholders, preservation of capital and realization of long-term capital appreciation upon the sale of such properties,

●

Offer an investment option in which the value of the common shares is correlated to real estate as an asset class rather than traditional asset classes such as stocks and bonds; and

●

Provide a hedge against inflation through use of month-to-month rentals or short-term and long-term lease arrangements with rental properties tenants.

The Trust may change the investment objectives only with the approval of holders of a majority of the outstanding common shares.

Investment Guidance

The Board of Trustees has provided investment guidance to the Advisor to direct the investment strategy of the Trust. Changes to the investment guidance must be approved by the Board. The Advisor has been authorized to execute:

●

Commercial and multifamily real estate property acquisitions and dispositions,

●

Investments in other real estate related assets, in each case so long as such investments are approved by our Board,

●

Acquisitions of property or land for the purposes of future development; and

●

Capital investments in the portfolio’s current properties through capital improvements.

The Board will have ultimate oversight over the Trust’s investments and may change from time to time the scope of authority delegated to the Advisor with respect to acquisition and disposition transactions.

Investment Strategy

Sterling’s current investment strategy and focus is on multifamily properties. Our Advisor monitors industry trends and invests in property believed to provide the most favorable return balanced with risk. We attempt to manage our real estate portfolio by evaluating changes or trends in the industries in which our tenants operate, the creditworthiness of our tenants and changes or trends in the area demographics surrounding our properties for evidence that our properties will continue to meet our investment objectives of cash flow, preservation of capital and capital appreciation. There is no current plan for the existing commercial properties (industrial, medical, office and retail) regarding retention, acquisition, or disposition.

The Trust will primarily invest in existing or newly developed real estate properties. The Trust may also invest in interests in real estate properties by acquiring direct ownership or ownership interests with other investors, including affiliates of the Advisor, through holding company structures or joint ventures, real estate partnerships, tenant-in-common deals, REITs, or other collective investment vehicles. The Trust may also invest in other real estate property types, including undeveloped land or other development opportunities if the land is acquired for the purpose of producing rental or other operating income in the future. The properties the Trust primarily invests in have existing rent and expense schedules, or the properties are newly constructed with predictable cash flows.

Most current acquisitions are in or near metropolitan areas. However, there is no limitation on the geographic areas in which we may acquire targeted investments.

The Trust may also acquire portfolios of real estate properties held by individual owners and real estate properties held by funds, including hedge funds. It is anticipated that such property owners will primarily sell the properties in exchange for limited partnership interests of the operating partnership.

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SEGMENT DATA

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multifamily. Our commercial properties include retail, office, industrial and medical properties. We assess and measure operating results based on the non-GAAP financial measurement of 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 administrative costs). 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.

COMPETITION

Our properties are located in highly competitive real estate markets. The number of competitive properties in a particular area could have a material adverse effect on our ability to lease space and the amount of rent we can charge at our properties. We compete with many property owners, such as corporations, limited partnerships, individual owners, other real estate investment trusts, insurance companies and pension funds.

Our competition also consists of other owners and developers of multifamily and commercial properties who are trying to attract tenants to their properties. This competition influences our ability to acquire properties and the prices that we may pay for those properties. We believe, however, that the diversity of our investments, the experience and abilities of our management and the quality of our assets affords us some competitive advantages that have in the past, and should in the future, allow us to operate our business successfully despite the competitive nature of our business.

Generally, there are multifamily and other similar commercial properties within relatively close proximity to each of our properties. The majority of our retail properties are restaurants and pharmacies. In addition to competitor retail properties with similar business models, we and our tenants face increasing competition from outlet malls, internet shopping websites, discount shopping clubs, catalog companies, direct mail and telemarketing.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

As an owner of real estate, we are subject to various environmental laws, rules and regulations adopted by various governmental bodies or agencies. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations, and some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Some of these laws and regulations may impose joint and several liability on residents, owners, or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us.

In addition, we are subject to many other laws and governmental regulations applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1991, to be accessible to the handicapped and prohibits housing discrimination based upon familial status.

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The Housing for Older Persons Act (“HOPA”) provides age-based discrimination exceptions for housing developments qualifying as housing for older persons. Non-compliance with ADA, FHAA or HOPA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation. We believe our properties which are subject to ADA, FHAA and/or HOPA are substantially in compliance with their present requirements.

Compliance with these laws, rules, and regulations has not had a material adverse effect on our business, assets, or results of operations, financial condition, or ability to pay dividends. We do not believe our existing portfolio as of December 31, 2022 will require us to incur material expenditures to comply with these laws and regulations. However, we cannot assure that future laws, ordinances, or regulations will not impose any material liability, or that the current environmental condition of our properties will not be affected by the operations of tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

AVAILABLE INFORMATION

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to these filings with the Securities and Exchange Commission (“SEC”). The public may read any materials filed by us with the SEC on the internet site maintained by the SEC at www.sec.gov. We also maintain an internet site at www.smftrust.com, which includes the reports and other documents we file with the SEC. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. This reference to our website is not intended to incorporate information found on the website into this filing.

ITEM 1A. RISK FACTORS

Risks Related to Sterling Real Estate Trust

Our results are dependent on amounts received from the leasing and resale of investments, which are subject to market and economic changes. If income is insufficient to meet our capital needs, our ability to carry out our business plans could be adversely affected.

Our purpose is to acquire and hold real estate investments as long-term investments. The primary income that will be generated by us will be the profits, if any, from the operation or holding of the real estate and upon the resale of the investments. If circumstances arise which cause an investment to become undesirable or remain at its current value or decrease in value, we may generate less income than anticipated.

Our success is based on continuing to locate and hold suitable real estate investments, and failure of our Advisor to locate additional suitable properties or the unsuccessful operation of our existing real estate investments could adversely affect our operations and our ability to pay dividends.

Our ability to achieve our investment objectives and to pay dividends to our shareholders and distributions to unitholders is dependent upon the performance of our Advisor in locating suitable investments and appropriate financing arrangements for us as well as on the successful management of our properties after acquisition. We currently own, through the operating partnership, the properties described under Item 2 — Properties. We cannot be sure our Advisor will be successful in locating suitable investments on financially attractive terms, or be certain that operation of the properties will avoid the risks attendant to real estate acquisitions, such as:

●

The risk properties may not perform in accordance with expectations, including projected occupancy and rental rates.

●

The risk we may have underestimated the cost of improvements or repairs required to bring or keep an acquired property up to or at standards established for its intended use or its intended market position.

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We may have to make expedited decisions on whether to invest in certain properties, including prior to receipt of detailed information.

We may be required to make expedited decisions in order to effectively compete for the acquisition of desirable properties and other assets. In such cases, our Advisor and Board of Trustees may not have access to detailed information regarding real estate investments at the time of making an investment decision to pay a non-refundable deposit and to proceed with an acquisition. In addition, the actual time period during which our Advisor will be allowed to conduct due diligence may be limited. Therefore, there can be no assurance our Advisor and Board of Trustees will have knowledge of all circumstances that may adversely affect an investment.

We may change our investment and operational policies without shareholder consent, and such changes could increase our exposure to additional risks.

Generally, the Board of Trustees may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our shareholders, which could result in our making investments different from, and possibly riskier than investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

There can be no assurance dividends or distributions will be paid or increase over time.

There are many factors that can affect the availability and timing of cash dividends to our shareholders and distributions to unitholders. Dividends and distributions will be based principally on cash available from our real estate and other investments. The amount of cash available for dividends will be affected by many factors, such as our ability to acquire profitable real estate investments, successfully manage our real estate properties, our operating expenses, and general economic conditions. We can give no assurance we will be able to pay or maintain dividends or distributions or that dividends or distributions will increase over time.

Dividends may include a return of capital, and shareholders may be required to recognize capital gain on distributions.

Dividends payable to shareholders may include a return of capital. To the extent dividends exceed cash flow from operations, a shareholder’s basis in our shares will be reduced and, to the extent dividends exceed a shareholder’s basis, the shareholder may recognize capital gain and be required to make tax payments.

We depend on certain executive officers and trustees, and the loss of such persons may delay or hinder our ability to carry out our investment strategies.

Our future success substantially depends on the active participation of James Wieland, one of our trustees, Kenneth Regan, Chief Executive Officer and a trustee, Joel Thomsen, President, Damon Gleave, Chief Financial Officer and Treasurer, and Barry Schmiess, Chief Investment Officer. Messrs. Wieland, Regan, and Thomsen are also governors and owners of our Advisor. Messrs. Wieland, and Regan, have over 40 years of extensive experience each in the commercial real estate industry, and have been instrumental in setting our strategic direction, operating our business and arranging necessary financing, and through the Advisor, in locating desirable real estate investments and were serving as property manager, managing our properties. Losing the services of Messrs. Wieland, Regan, Thomsen, Gleave, or Schmiess without replacing their position with someone of the same competence and experience, could have a material adverse effect on our ability to successfully carry out our investment strategies and achieve our investment objectives. There can be no guarantee they will remain affiliated with us. See “Risks Related to Conflicts of Interest”.

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Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data, or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation, and damage to our investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those provided by Sterling Management and service providers. Our and Sterling Management’s processes, procedures and internal controls that are designed to mitigate cybersecurity risks and cyber intrusions do not guarantee that a cyber incident will not occur or that our financial results, operations, or confidential information will not be negatively impacted by such an incident.

We are not required to comply with certain reporting requirements, including those relating to auditor’s attestation reports on the effectiveness of our system of internal control over financial reporting, accounting standards and disclosure about our executive compensation, that apply to other public companies.

So long as our shares of common stock are not traded on a securities exchange, we will be deemed to be a “non-accelerated filer” under the Exchange Act, and as a non-accelerated filer, we will be exempt from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In addition, so long as we are externally managed by the Advisor and we do not directly compensate our executive officers, or reimburse the Advisor or its affiliates for salaries, bonuses, benefits and severance payments for persons who also serve as one of our executive officers or as an executive officer of the Advisor, we do not have any executive compensation.

Many of our costs, such as operating and general and administrative expenses, real estate acquisition, and constructions costs, could be adversely impacted by period of heightened inflation.

A sustained or further increase in inflation could have an adverse impact on our operating expenses incurred in connection with, among others, the property-related services such as repairs and maintenance, janitorial, utilities, security and insurance. Our operating expenses may be recoverable through commercial lease arrangements.

Risks Related to Our Structure

Our shareholders may experience dilution if we or our operating partnership issues additional securities.

Our shareholders do not have preemptive rights to any shares issued by us in the future. If we sell or issue additional shares in the future to raise capital, pursuant to a dividend reinvestment plan or in exchange for limited partnership units pursuant to our operating partnership’s Limited Liability Limited Partnership Agreement (“LLLP Agreement”), our shareholders will experience dilution of their equity investment. In addition, if our operating partnership sells additional securities or issues additional securities in connection with a property acquisition transaction, we would, and indirectly our shareholders would, experience dilution in their equity position.

Our securityholders have limited control over our operation, and the Board of Trustees has the sole power to appoint and terminate the Advisor.

Our Board of Trustees has the authority to determine our major policies, including our policies regarding financing, growth, investment strategies, debt capitalization, REIT qualification, distribution, and to take certain actions including acquiring or disposing of real estate and real estate related investments, dividend declaration and the election or removal of the Advisor. Our securityholders do not have the right to remove the Advisor but have the right to elect and remove trustees.

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Under our Third Amended and Restated Declaration of Trust, our trustees may not do the following without the approval of the holders of a majority of the outstanding common shares of beneficial interest:

●

Amend the Third Amended and Restated Declaration of Trust, except for amendments which do not adversely affect the rights, preference and privileges of shareholders.

●

Sell all or substantially all of our assets other than in the ordinary course of business or in connection with a liquidation and dissolution.

●

Conduct a merger or other reorganization of the trust; or

●

Dissolve or liquidate us.

Our shareholders have the right, without the concurrence of the Board of Trustees, to terminate the trust and liquidate our assets or amend the Third Amended and Restated Declaration of Trust.

Shareholders have no role in determining our investments and must rely on our Advisor and oversight by the Board of Trustees.

For future acquisitions or dispositions, the Board of Trustees has the authority to approve investment acquisitions or dispositions without shareholder approval. Therefore, shareholders will not be able to evaluate the terms of future investment acquisitions or dispositions, their economic merit or other relevant financial data before we acquire or sell investments. Shareholders must rely entirely on the oversight of our Board of Trustees, the management ability of our Advisor and the performance of the property managers.

We may issue securities with more favorable terms than the outstanding shares without shareholder approval.

Under our Third Amended and Restated Declaration of Trust, our Board of Trustees has the authority to establish more than one class or series of shares and to fix the relative preferences and rights regarding conversion, voting powers, restrictions, limitations as to dividends and other distributions, and terms or conditions of redemption of such different classes or series without shareholder approval. Thus, our Board could authorize the issuance of a class or series of shares with terms and conditions that could have priority as to dividends and amounts payable upon liquidation over the rights of the holders of our outstanding common shares of beneficial interest. Such class or series of shares could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our shares, even if it would be in the best interest of our shareholders.

Shareholders could incur current tax liability on dividends they elect to reinvest in our shares, and may have to use separate funds to pay their tax liability.

Shareholders that participate in our dividend reinvestment plan will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional dividend to the extent the shares are purchased at a discount to fair market value. As a result, unless shareholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the shares received.

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There may be conflicts of interest between us and our shareholders on one side and our operating partnership and its limited partners on the other side.

Our trustees and officers have duties to us and our shareholders in connection with their management of us. At the same time, we, as general partner will have duties to our operating partnership and its limited partners in connection with the management of the operating partnership. Our duties as general partner of the operating partnership may come into conflict with the duties of our trustees and officers to us and our shareholders. The LLLP Agreement of our operating partnership expressly limits our liability for monetary damages by providing we will not be liable for losses sustained, liabilities incurred or benefits not derived if we acted in good faith. In addition, our operating partnership is required to indemnify us and our trustees and officers from and against any and all claims arising from operations of our operating partnership, unless it is established: (1) the act or omission was material and committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe the act or omission was unlawful. The LLLP Agreement also provides that we will not be held responsible for any misconduct or negligence on the part of any agent appointed by us in good faith.

There is no public trading market for our shares, nor do we expect one to develop, which may negatively impact our shareholders’ ability to sell their shares and the price at which shares may be sold.

There is no public market for our shares and there is no assurance one may develop. In addition, the price shareholders may receive for the sale of their shares is likely to be less than the proportionate value of our investments. If our shareholders are able to find a buyer for their shares, they may have to sell them at a substantial discount from the price they purchased the shares. Consequently, shareholders may not be able to liquidate their investments in the event of emergency or for any other reason. Therefore, shareholders should consider our securities as illiquid and a long-term investment and should be prepared to hold their shares for an indefinite period of time.

The estimated value of our common stock is based on a number of assumptions and estimates that may not be accurate and is also subject to a number of limitations.

The current estimated value of our common stock as of January 1, 2023, is approximately $23.00 per share. The methodology used by our Board to determine this value was based on estimates of the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain and certain additional information. No formal valuation has been undertaken by us. Our valuation process involves a number of estimates, assumptions and subjective judgments that may not be accurate and complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated value per share may not represent current market values or fair values as determined in accordance with U.S. generally accepted accounting principles. A shareholder should not rely on the estimated value per share as being an accurate or precise measure of the then-current value of the shares of our common stock in making a decision to buy or sell shares of our common stock, including whether to reinvest dividends by participating in the dividend reinvestment plan and whether to request redemption pursuant to our share redemption program.

Risks Related to Our Status as a REIT and Related Federal Income Tax Matters

If we fail to continue to qualify as a REIT, we would incur additional tax liabilities that would adversely affect our operations and our ability to make distributions and could result in a number of other negative consequences.

Although our management believes we are organized, have operated, and will be able to continue to be organized and to operate in such a manner to qualify as a real estate investment trust (REIT), as that term is defined under the Internal Revenue Code, we may not have been organized, may not have operated, or may not be able to continue to be organized or to operate in a manner to have qualified or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status.

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The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control, regarding our organization and ownership, distributions of our income and the nature and diversification of our income and assets. The fact we hold substantially all of our assets through our operating partnership and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.

If we lose our REIT qualification, we will face income tax consequences that will reduce substantially our available cash for dividends and investments for each of the years involved because:

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We would be subject to federal corporate income taxation on our taxable income, including any applicable alternative minimum tax, and could be subject to increased state and local taxes.

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We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income; and

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Unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

The increased taxes could reduce the value of the shares as well as cash available for dividends to shareholders and investments in additional assets. In addition, if we fail to continue to qualify as a REIT, we will not be required to pay dividends to shareholders. Our failure to continue to qualify as a REIT also could impair our ability to expand our business and to raise capital.

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal and state taxes on our income or property, including the following:

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To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gains) to our shareholders. If we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on the undistributed income. In such situation, shareholders will be treated as having received the undistributed income and having paid the tax directly, but tax-exempt shareholders, such as charities or qualified pension plans, will receive no benefit from any deemed tax payments.

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We may be subject to state and local taxes on our income or property, either directly or indirectly, because of the taxation of our operating partnership or of other entities through which we indirectly own our assets.

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If we have net income from the sale of foreclosure property we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

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If we sell a property, other than foreclosure property, we hold primarily for sale to customers in the ordinary course of business, our gain will be subject to the 100% “prohibited transaction” tax.

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We will be subject to a 4% nondeductible excise tax on the amount, if any, by which the distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

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We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.

To qualify as a REIT, in general, we must distribute to our shareholders at least 90% of our net taxable income each year, excluding capital gains. However, we could be required to include earnings in our net taxable income before we actually receive the related cash. If we do not have sufficient cash to pay the necessary dividends to preserve our REIT status for any year or to avoid taxation, we may need to borrow funds, to sell assets or to issue additional securities even if the then-prevailing market conditions are not favorable for such actions. In addition, we will require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

If our operating partnership does not qualify as a partnership, its income may be subject to taxation, and we would no longer qualify as a REIT.

The Internal Revenue Code classifies “publicly traded partnerships” as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. We structured our operating partnership to be classified as a partnership for federal income tax purposes. However, no assurance can be given the IRS will not challenge our position or will classify our operating partnership as a “publicly traded partnership” for federal income tax purposes. To minimize this risk, we have placed certain restrictions on the transfer and/or redemption of partnership units in the LLLP Agreement. If the IRS would assert successfully our operating partnership should be treated as a “publicly traded partnership” and substantially all of the operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat the operating partnership as an association taxable as a corporation. In such event, we would cease to qualify as a REIT. In addition, the imposition of a corporate tax on the operating partnership would reduce the amount of distributions the operating partnership could make to us and, in turn, reduce the amount of cash available to us to pay dividends to our shareholders.

We have transfer restrictions on our shares that may limit offers to acquire substantial amounts of the Trust’s shares at a premium.

To qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Currently, Third Amended and Restated Declaration of Trust prohibits transfers of our shares that would result in: (1) our shares being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our shares, applying broad attribution rules imposed by the federal income tax laws, or (3) before our shares qualify as a class of publicly-offered securities, 25% or more of our shares being owned by ERISA investors. If a shareholder acquires shares in excess of the ownership limits or in violation of the restrictions on transfer, we:

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May consider the transfer to be void ab initio.

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May not reflect the transaction on our books.

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May institute legal action to enjoin the transaction.

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May redeem such excess shares.

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Automatically transfer any excess shares to a charitable trust for the benefit of a charitable beneficiary.

If such excess shares are transferred to a trust for the benefit of a charitable beneficiary, the charitable trustee shall sell the excess shares and the shareholder will be paid the net proceeds from the sale equal to the lesser of: (1) the price paid by the shareholder or the “market price” of our shares if no value was paid or (2) the price per share received by the charitable trustee.

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If shares are acquired in violation of the ownership limits or the restrictions on transfer described above:

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Transferee may lose its power to dispose of the shares; and

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Transferee may incur a loss from the sale of such shares if the fair market price decreases.

These limitations may have the effect of preventing a change of control or takeover of us by a third party, even if the change in control or takeover would be in the best interest of our shareholders.

Complying with REIT requirements may restrict our ability to operate in a way to maximize profits.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders, and the ownership of our common shares. For example, we may be required to pay dividends to our shareholders at disadvantageous times, including when we do not have readily available funds. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to forego or liquidate otherwise attractive investments which could negatively impact shareholder value.

To qualify as a REIT, at the end of each calendar quarter, at least 75% of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets), in general, cannot include more than 10% of the voting securities of any one issuer or more than 10% of the value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries. Therefore, we may be required to liquidate otherwise attractive investments or may be forced to forego attractive investments to satisfy these requirements. Such action or inaction could be adverse to our shareholder interests.

Gains from asset sales may be subject to a 100% prohibited transaction tax, which tax could reduce the Trust’s available assets and reduce shareholder value.

We may have to sell assets from time to time to satisfy our REIT distribution requirements and other REIT requirements or for other purposes. The IRS may posit one or more asset sales may be “prohibited transactions.” If we are deemed to have engaged in a “prohibited transaction,” our gain from such sale would be subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax, but we cannot assure you we will be able to qualify for the safe harbor. We will use reasonable efforts to avoid the 100% tax and we do not intend to hold assets in a manner to cause their dispositions to be treated as “prohibited transactions,” but we cannot assure you the IRS will not challenge our position, especially if we make frequent sales or sales of assets in which we have short holding periods. Payment of a 100% tax would adversely affect our results of operations.

Ordinary dividends payable by REITs generally are taxed at the higher ordinary income rate which could reduce the net cash received by shareholders.

The maximum U.S. federal income tax rate for “qualified dividends” payable by U.S. corporations to individual U.S. shareholders currently is 20%. In addition, the 3.8% tax on net investment income may apply to such dividends. In general, ordinary dividends payable by REITs to its individual U.S. shareholders, however, are generally not eligible for the reduced rates and generally are taxed at ordinary income rates (for REIT dividends received after December 31, 2017, the maximum individual income tax rate currently is 37%, but the current maximum, effective federal income tax rate as to REIT dividends may be reduced to 29.6% because of a partial deduction that may apply with respect to REIT dividends; in addition, the 3.8% tax on net investment income may apply to REIT dividends). It is also possible tax legislation that has or may be enacted might increase this rate differential. The differing treatment of dividends received from REITs and other corporations might cause individual investors to view an investment in REITs as less attractive related to other corporations which might be detrimental to our ability to raise additional funds through the sale of our common shares.

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Changes in legislative or other actions affecting REITs may adversely affect our status as a REIT.

The rules dealing with U.S. federal income taxation are constantly under review by the legislative process, the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may apply retroactively) could adversely affect us or our shareholders. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the federal income tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification. We cannot predict whether, when, in what forms, or with what effective dates, the laws applicable to us or our shareholders may be changed.

Our Board of Trustees may revoke our REIT election without shareholder approval, and we would no longer be required to make distributions of our net income.

Our Board of Trustees can revoke or otherwise terminate our REIT election without the approval of our shareholders if our Board determines it is not in our best interest to continue to qualify as a REIT. In such case, we would become subject to U.S. federal income tax on our taxable income, and we no longer would be required to distribute most of our net income to our shareholders, which may reduce the total return to our shareholders and affect the value of the shares.

Risks Related to Tax-Exempt Investors

Common shares may not be a suitable investment for tax-exempt investors.

There are special considerations that apply to investing in common shares on behalf of a trust, pension, profit sharing or 401(k) plans, health or welfare plans, trusts, individual retirement accounts (IRAs), or Keogh plans. If you are investing the assets of any of the above in common shares, you should satisfy yourself:

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Your investment is consistent with your fiduciary obligations under applicable law, including common law, ERISA and the Internal Revenue Code.

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Your investment is made in accordance with the documents and instruments that govern the trust, plan or IRA, including any investment policy.

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Your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code.

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Your investment will not impair the liquidity of the trust, plan or IRA.

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Your investment will not produce “unrelated business taxable income” for the trust, plan or IRA.

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You will be able to value the assets of the trust, plan or IRA annually in accordance with ERISA requirements and applicable provisions of the trust, plan, or IRA; and

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Your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

We have not evaluated, and will not evaluate, whether an investment in us is suitable for any particular trust, plan, or IRA.

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Under certain circumstances, tax-exempt shareholders may be subject to unrelated business taxable income, which could adversely affect such shareholders.

Neither ordinary nor capital gain distributions with respect to our common shares nor gain from the sale of our common shares, in general, should constitute unrelated business taxable income to tax-exempt shareholders. The following, however, are some exceptions to this rule:

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Under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our common shares may be treated as unrelated business taxable income if our common shares are held predominately by qualified employee pension trusts (which we do not expect to be the case).

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Part of the income and gain recognized by a tax-exempt shareholder with respect to common shares would constitute unrelated business taxable income if the tax-exempt shareholder incurs debt to acquire the common shares; and

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Part or all of the income or gain recognized with respect to our common shares held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Internal Revenue Code may be treated as unrelated business taxable income.

Therefore, tax-exempt shareholders are not assured all dividends received from the trust will be tax-exempt.

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Risks Related to Our Relationship with the Advisor and Its Affiliates

We depend on our Advisor for the successful operations of the REIT, and if required, we may not be able to find a suitable replacement advisor.

Our ability to achieve our investment objectives is dependent upon the successful performance of our Advisor in locating attractive acquisitions, advising on dispositions of real estate properties and other real estate related assets, advising on any financing arrangements and other administrative tasks to operate our business. If the Advisor suffers or is distracted by adverse financial and operational problems in connection with its operations unrelated to us or for any reason, it may be unable to allocate a sufficient amount of time and resources to our operations. If this occurs, our ability to achieve our investment objectives or pay dividends to our shareholders may be adversely affected. Any adversity experienced by the Advisor or problems in our relationship with the Advisor could also adversely impact the operation of our properties and, consequently, our cash flow and ability to pay dividends to shareholders.

Either we or the Advisor can terminate the Advisory Agreement upon 60 days written notice to the other party for any reason, or we can terminate the Advisory Agreement immediately for cause or material breach of the Advisory Agreement. In addition, the Board of Trustees may determine not to renew the Advisory Agreement in any year. If this occurs, we would need to find another advisor to provide us with day-to-day management services or engage employees to provide these services directly to us, which would likely be difficult to do and may be costly. There can be no assurances we would be able to find a suitable replacement advisor or suitable employees or enter into agreements for such services on acceptable terms.

The termination or replacement of the Advisor could trigger a default or repayment event under financings.

Lenders providing financing for our acquired properties may include provisions in the mortgage loan documentation that state the termination or replacement of the Advisor is an event of default or an event triggering acceleration of the repayment of the loan in full. Even though we will attempt to have such provisions excluded from the loan documents, the lenders may still require them to be included. In addition, the termination or replacement of the Advisor could trigger an event of default under any credit agreement governing a line of credit we may obtain. If an event of default or repayment event occurs with respect to any of our properties, our ability to achieve our investment objectives could be materially adversely affected.

The Advisor may not be able to retain its key employees, which could adversely affect our ability to carry out our investment strategies.

We depend on the Advisor’s key officers, employees and governors. However, none of these individuals have an employment agreement with the Advisor and the loss of any or all of such person’s services and the Advisor’s inability to find, or any delay in finding, replacements with equivalent skills and experience, could adversely impact our ability to successfully carry out our investment strategies and achieve our investment objectives.

Our future success also depends on the Advisor’s and its affiliates’ ability to identify, hire, train and retain highly qualified real estate, managerial, financial, marketing, and technical personnel to provide the services to us pursuant to the Advisory Agreement and any other written services agreement, including any property management agreements. Competition for such personnel is intense, and the Advisor or its affiliates may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary personnel could have a material adverse effect on our business and results of operations.

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Risks Related to Investments in Real Estate

Insufficient geographic diversity of our real estate investments could adversely affect our operating results if economic changes impact real estate markets where we own significant assets.

Geographic concentration of our properties may expose us to economic downturns in those areas where our properties are located. A recession in any area where we own several properties or interests in properties could adversely affect our ability to generate or increase operating revenues, locate, and retain financially sound tenants or dispose of unproductive properties. In addition, it could have an adverse impact on our tenant’s ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Currently, the majority of our properties are located in North Dakota and Minnesota, and we hold several properties in Fargo, North Dakota and Moorhead, Minnesota. To the extent weak economic or real estate conditions affect North Dakota, Minnesota, or other markets in which we own properties more severely than other areas of the country, our financial performance could be negatively impacted.

We may invest in and develop undeveloped real property, which requires us to pay expenses prior to receiving any income on the property.

We have the discretion to invest up to 10% of our total assets in undeveloped property. When we invest in undeveloped property, such property does not generate operating revenue while costs are incurred to develop the property and may generate other expenses including property taxes and insurance. In addition, construction and development of such properties may not be completed within budget or as scheduled and projected rental levels may not be achieved. In addition to the risks of real estate investments in general, an investment in undeveloped property is subject to additional risks, including the expense and delay which may be associated with rezoning the land for a higher use and the development and environmental concerns of governmental entities and/or community groups. Therefore, we will not generate income on such property until development is completed and we begin leasing the property.

We may acquire multiple properties in a single transaction, which may adversely affect our operations through the inclusion of less desirable investments or financing requirements greater than we would otherwise be willing to incur.

Periodically, we may acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single property acquisitions, and the risk a multiple property acquisition does not close may be greater than in a single property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns we can earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for dividends. Any of the foregoing events may increase the risk of adverse business results and negatively affect our results of operations.

We may invest in co-ventures, where our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of a real estate investment and lower our overall return.

We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with our Advisor, its affiliates, our trustees, or third parties having investment objectives similar to ours in the acquisition of real estate investments. In such arrangements, we may be acquiring non-controlling interests in or sharing responsibility for managing the affairs of the investment. In such event, we would not be in a position to exercise sole decision-making authority. Investments such as these may, under certain circumstances, involve risks not present where another party is not involved, including the possibility that partners or co-investees might become bankrupt or fail to fund their required capital contributions. Co-investees may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.

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Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-investee would have full control over the joint venture. Disputes between us and co-investees may result in litigation or arbitration that would increase our expenses and prevent our management and the Advisor from focusing their time and effort on our business. Consequently, actions by or disputes with co-investees might result in subjecting additional risk to properties owned by the investment. In addition, we may in certain circumstances be liable for the actions of our co-investees. Any of these risks could subject us to liabilities in excess of those contemplated and reduce our returns on that investment.

We could experience difficulties or delays renewing leases or re-leasing space, which will increase our costs to maintain such properties without receiving income.

We derive a significant portion of our net income from rent received from our tenants. Our properties include both residential as well as commercial properties. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. If lease defaults occur, we may experience delays in enforcing our rights as landlord. Also, if our tenants decide not to renew their leases, terminate early or default on their lease, we may not be able to re-let the space or may experience delays in finding suitable replacement tenants. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, particularly commercial tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay dividends to shareholders could be materially adversely affected. Further, if one of our properties cannot be leased on terms and conditions favorable to us, the property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all.

We could face potential adverse effects if a commercial tenant is unable to make timely rental payments, declares bankruptcy or become insolvent.

If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Delayed rental payments could adversely affect cash flow available for dividends. If a commercial tenant declares bankruptcy or becomes insolvent, it may adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. However, if a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy. If a court authorizes the commercial tenant to reject and terminate its lease with us, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In addition, it is unlikely a bankrupt tenant would pay in full amounts it owes us under a lease. Additionally, we may be required to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as lower our rental rates to reflect any decline in market rents. This shortfall could adversely affect our cash flow and results of operations.

Investments in real estate are illiquid, and we may not be able to resell a property on terms favorable to us.

We intend to hold real estate properties until such time as our Advisor determines a sale or other disposition appears to be advantageous or when our shareholders approve our termination and liquidation. Because real estate investments are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may be a result of economic conditions, availability of financing, interest rates and other factors beyond our control. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate investments by their nature are often difficult or time consuming to liquidate. In addition, federal tax laws imposing a 100% excise tax on gains from sales of certain types of property sales by a REIT (generally, property viewed as being purchased for resale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our shareholders. These restrictions could adversely affect our ability to achieve our investment objectives.

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Valuations and appraisals of our investments may not necessarily correspond to realizable value.

We value our real estate properties initially at cost, which we expect to represent fair value at that time. After acquisition, valuations may include appraisals of our properties periodically. The valuation methodologies used to value our real estate properties will involve subjective judgments regarding such factors as comparable sales, rental and operating expense data, the capitalization and/or discount rate and projections of future rent and expenses based on appropriate analysis. Although we believe our valuation procedures are designed to determine the accurate fair value of our assets, appraisals and valuations of our real estate properties and other investments assets will be only estimates of fair value and therefore may not correspond to realizable value upon a sale of those assets.

Uninsured losses related to real estate investments may adversely affect our results of operation.

We purchase, and we may be required by lenders of mortgage loans or other financings to obtain, certain insurance coverage on our real estate investments. Either the property manager or the Advisor selects policy specifications and insured limits which it believes to be appropriate and adequate given the risk of loss, the cost of the coverage and industry practice. The nature of the tenants at the properties we hold may expose us and our operations to an increase in liability for personal injuries or other losses. There can be no assurance that such insurance will be sufficient to cover potential liabilities. Some of our policies may be subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. Furthermore, insurance against certain risks, such as terrorism, flood, and toxic mold, may be unavailable or available at commercially unreasonable rates or in amounts less than the full market value or replacement cost of the properties. There can be no assurance particular risks that are currently insurable, will continue to be insurable on an economical basis or current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment in a property as well as the anticipated future cash flows from such properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. We may also be liable for any uninsured or underinsured personal injury, death, or property damage claims, which could result in decreased dividends to shareholders.

We may acquire a property or properties “AS IS,” which increases the risk of an investment that requires us to remedy defects or costs without recourse to the prior owner.

We may acquire real estate properties “as is” with only limited representations and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. As a result, if defects in the property (including any building on the property) or other matters adversely affecting the property are discovered, we may not be able to pursue a claim for any or all damage against the property seller. Such a situation could negatively affect our results of operations.

We rely on affiliated and outside property managers to properly manage and lease our properties.

The Advisor and an affiliate of the Advisor serve as our principal property managers, and the Advisor has hired and intends to hire other affiliates and/or third parties to serve as additional property managers, to manage our properties and act as leasing agents to lease vacancies in our real estate properties. These property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not, and the Advisor will not as to its affiliates and third-party property managers, supervise any of the property managers or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in large part on the ability of our property managers to manage the day-to-day operations and their ability to lease vacancies in our properties. Any adversity experienced by our property managers could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives.

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Risks Related with Our Indebtedness and Financing

Market conditions could adversely affect our ability to obtain financing.

As a REIT, we are required to distribute at least 90% of our taxable income (excluding net capital gains) to our shareholders in each taxable year, and thus our ability to retain internally generated cash is limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties can depend on our ability to obtain debt or equity financing from third parties or the sellers of properties or to sell other properties. Market fluctuations and disruptions in the credit markets could significantly affect our ability to access capital. Reductions in our available borrowing capacity, or inability to establish a credit facility when required or when business conditions warrant, could then limit the number, size and quality of properties we could acquire or the amount of improvements we could make on acquired properties, which could materially affect our ability to achieve our investment objectives and may result in price or value decreases of our real estate assets.

Derivatives and hedging activity could adversely affect cash flow.

In the normal course of business, we use derivatives to manage our exposure to interest rate volatility on debt instruments, including hedging for future debt issuances. At other times we may utilize derivatives to decrease our exposure to floating interest rates. There can be no assurance that these hedging arrangements will have the desired beneficial impact. These arrangements, which can include a number of counterparties, may expose us to additional risks, including failure of any of our counterparties to perform under these contracts, and may involve extensive costs, such as transaction fees or breakage costs, if we terminate them. No strategy can completely insulate us from the risks associated with interest rate volatility.

The phase out of LIBOR and transition to SOFR as a benchmark interest rate could have adverse effects.

In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2023, it is expected that no new contracts will reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including the Company, are impacted by the risks associated with this transition and therefore it could adversely affect our operations and cash flows.

We could face difficulties in refinancing loans involving balloon payment obligations.

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or our ability to sell the particular property. If we try and refinance the debt, we may not be able to obtain terms as favorable as the original loan. Based on current market interest rates, the interest rate obtained upon refinancing in subsequent years may be higher than the original loan. If we are not able to refinance the debt, or obtain acceptable terms, we may be required to sell the mortgaged property at a time which may not permit realization of the maximum return on such property. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets.

Lenders may require restrictive covenants relating to our operations, which may adversely affect our flexibility and our ability to achieve our investment objectives.

Mortgage loans obtained by us could impose restrictions that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in the property. Loan documents may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, replace the Advisor or the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

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Increases in interest rates on variable rate debt incurred and new financings by us will reduce cash available for dividends.

Increases in interest rates on any variable rate debt incurred or new financings would increase our interest costs, which could reduce our cash flows and our ability to pay dividends to our shareholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

Complying with REIT requirements may limit our ability to hedge liabilities through tax-efficient means, which may adversely affect our results of operations.

We have entered into a number of hedging transactions and may enter into additional such transactions. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments. The REIT provisions of the Code substantially limit our ability to hedge liabilities. Because we conduct substantially all of our operations through our operating partnership, any income from a hedging transaction entered into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets will not constitute gross income to us for purposes of the 75% or 95% gross income test. As a result, we may be required to limit the operating partnership’s use of advantageous hedging techniques or to implement hedges through certain taxable corporations. This could increase the costs and risks of hedging activities. We intend to structure any hedging transaction in a manner that does not jeopardize our ability to qualify as a REIT.

Risks Related to Other Investments

Investments in other real estate related investments could involve higher risks than investment in real estate properties, which could adversely affect our operations and ability to make dividend payments.

We are permitted to invest in other real estate assets. We can invest in real estate equity, debt, and derivative securities. These assets can be quite risky, illiquid, and volatile and the value of these assets could cause the value of our shares to fluctuate and could result in losses that materially adversely affect our results of operations.

Risks Related to Conflicts of Interest

We are subject to several conflicts of interest arising out of our relationships with our affiliates, including our Advisor and its affiliates.

There are conflicts of interest in our relationship with the Advisor and its affiliates and several trustees, which could adversely affect our operations and business operations.

We are subject to potential conflicts of interest arising out of our relationships with the Advisor, its affiliates, and certain trustees. Conflicts of interest may arise among a trustee or the Advisor and its respective affiliates, on the one hand, and us and our shareholders, on the other hand. As a result of these conflicts, the trustee or Advisor may favor its own interests or the interests of its affiliates over the interest of our shareholders or operating partnership.

Division of Loyalty/Allocation of time and effort

Several of our officers and/or trustees serve as officers, governors, and owners of one or more entities (certain of which are affiliated with our Advisor or trustees), property managers, tenants of our properties, brokerage companies and other real estate entities owning real estate investments. As a result, these individuals owe duties to these other entities and their investors, which may conflict with the duties that they owe to us and our shareholders. Their loyalties to these other entities and investors could result in action or inaction detrimental to our business or result in conflicts relating to the allocation of their time and services, which could harm implementation of our business strategy and investment and leasing opportunities.

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Allocation of investment opportunities

The Advisor and its affiliates are or may become committed to the management of other business ventures. Accordingly, there may be conflicts of interest between our investments and other investments or business ventures in which the Advisor and its affiliates are participants. In addition, the Advisor and its officers will advise other investment programs that invest in commercial real estate properties and real estate related assets in which we may be interested. Therefore, the Advisor could face conflicts of interest in allocating and determining which programs will have the opportunity to acquire and participate in such investments as they become available. As a result, other investment programs advised by the Advisor may compete with us with respect to investors and certain investments we may want to acquire.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

General

Our policy is to acquire assets with an intention to hold these assets as long-term investments seeking income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rent. These types of investments are the core of our strategy of creating shareholder value. We currently own and maintain a portfolio of real estate diversified by geographical location and by type and size.

The majority of our real estate investments are managed by a third party. Property management firms usually receive between 2% and 5% of gross rent collection for their services. Substantially all of our commercial revenues consist of base rents received under leases having terms ranging from month-to-month to over 25 years. More than half of our existing commercial property leases as of December 31, 2022 contain “step up” rental clauses providing for annual increases in the base rental payments of approximately 1.0% to 3.0% each year during the term of the lease.

Properties

As of December 31, 2022, we owned 185 properties located in 12 states, containing approximately 11,300 apartment units and 1,498,000 square feet of leasable commercial space. The residential and commercial portfolio of properties includes a diversified mixture of multifamily, single, and multi-tenant retail and office buildings as well as industrial and medical facility properties. The majority of the properties are located in the largest cities in the states of North Dakota and Minnesota.

As of December 31, 2022, approximately 78.8% (based on cost) of the properties were apartment communities. Most multifamily dwelling properties are leased to a variety of tenants under short-term leases of less than a year.

As of December 31, 2022, approximately 21.2% (based on cost) of the properties were comprised of industrial, office, retail and medical commercial properties. Most commercial properties are leased to a variety of tenants under long-term leases.

The following information applies to all of our operating properties:

●

We believe all of our properties are adequately covered by insurance and suitable for their intended purposes.

●

Our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and

●

Depreciation is provided on a straight-line basis over the estimated useful lives of the buildings.

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The below table sets forth certain information regarding each of our properties owned, including unconsolidated affiliates, as of December 31, 2022 (in thousands, except units or leasable sq. ft.).


			# of			Physical
			Units or			Occupancy
		Year	Leasable		Total	at December
Property	Location	Acquired	Sq. Ft		Investment	31, 2022

Bluemont Lakes Financial Center	Fargo, ND	2004	31,750	$	5,255	81.17	%
Amberwood	Grand Forks, ND	2016	96		4,147	94.67	%
Applebee’s Neighborhood Bar & Grill	Coon Rapids, MN	2010	5,576		2,442	100.00	%
Arbor	Bismarck, ND	2013	12		696	98.49	%
Arbor II	Bismarck, ND	2013	12		700	96.52	%
Arbor III	Bismarck, ND	2013	12		696	97.80	%
Ashbury	Fargo, ND	2013 & 2016	61		4,139	99.52	%
Auburn II	Fargo, ND	2007	24		1,111	98.45	%
Autumn Ridge	Grand Forks, ND	2004	144		10,418	95.50	%
Barrett Arms	Crookston, MN	2014	24		1,281	94.35	%
Bayview	Fargo, ND	2007	100		6,083	92.18	%
Bell Plaza* (FKA Northland Plaza)	Bloomington, MN	2015	299,660		51,421	65.57	%
Belmont	Bismarck, ND	2020	26		1,601	88.55	%
Berkshire	Fargo, ND	2008	12		525	97.96	%
Betty Ann	Fargo, ND	2009	24		1,012	97.58	%
Biolife Plasma Center	Bismarck, ND	2008	11,671		2,881	100.00	%
Biolife Plasma Center	Grand Forks, ND	2008	13,190		2,944	100.00	%
Biolife Plasma Center	Janesville, WI	2008	12,225		2,388	100.00	%
Biolife Plasma Center	Mankato, MN	2008	13,181		4,149	100.00	%
Biolife Plasma Center	Marquette, MI	2008	11,737		3,215	100.00	%
Biolife Plasma Center	Onalaska, WI	2008	12,180		2,531	100.00	%
Biolife Plasma Center	Oshkosh, WI	2008	12,191		2,297	100.00	%
Biolife Plasma Center	Sheboygan, WI	2008	13,230		2,654	100.00	%
Biolife Plasma Center	Stevens Point, WI	2008	13,190		2,595	100.00	%
Birchwood I	Fargo, ND	2017	12		468	98.78	%
Birchwood II	Fargo, ND	2017	54		2,881	96.96	%
Bradbury	Bismarck, ND	2018	96		6,093	93.48	%
Briar Pointe	Fargo, ND	2021	30		1,935	97.61	%
Bridgeport	Fargo, ND	2016	120		8,420	98.71	%
Bristol Park	Grand Forks, ND	2016	80		5,837	92.84	%
Brookfield	Fargo, ND	2008	72		2,680	95.90	%
Brownstone	Fargo, ND	2021	72		4,390	96.91	%
Cambridge (FKA 44th Street)	Fargo, ND	2013	42		2,558	99.37	%
Candlelight	Fargo, ND	2012	66		2,214	93.73	%
Carling Manor	Grand Forks, ND	2008	12		838	95.34	%
Carlton Place	Fargo, ND	2008	213		9,072	93.54	%
Carr	Fargo, ND	2017	18		874	99.13	%
Cedars 4	Fargo, ND	2018	18		1,245	97.23	%
Chandler 1802	Grand Forks, ND	2014	24		1,434	96.12	%
Chandler 1834	Grand Forks, ND	2018	12		710	91.43	%
Chandler 1866	Grand Forks, ND	2005	12		384	98.71	%
Chandler 1898	Grand Forks, ND	2022	12		512	100.00	%
Cherry Creek (FKA Village)	Grand Forks, ND	2008	35		2,008	96.95	%
Cityside	Fargo, ND	2018	36		1,396	89.43	%
Columbia Park Village	Grand Forks, ND	2020	12		648	91.03	%
Columbia West	Grand Forks, ND	2008	70		4,487	93.12	%
Country Club	Fargo, ND	2011	40		1,843	95.04	%
Countryside	Fargo, ND	2011	24		951	97.20	%
Courtyard	St. Louis Park, MN	2013	151		9,252	93.37	%
Dairy Queen	Dickinson, ND	2012	2,811		1,331	100.00	%
Dairy Queen	Moorhead, MN	2011	2,712		1,186	100.00	%
Dairy Queen	Apple Valley, MN	2018	5,348		1,673	-	%
Dakota Manor	Fargo, ND	2014	54		2,865	96.57	%
Danbury	Fargo, ND	2007	135		7,547	94.53	%
Dellwood Estates	Anoka, MN	2013	132		12,320	97.50	%
Deer Park	Hutchinson, MN	2022	138		15,091	95.99	%
Desoto Estates	Grand Forks, ND	2022	68		6,111	98.06	%

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Desoto Townhomes	Grand Forks, ND	2022	24	3,338	95.85	%
Diamond Bend	Mandan, ND	2022	78	10,971	92.53	%
Eagle Run	West Fargo, ND	2010	144	7,067	96.38	%
Eagle Sky I	Bismarck, ND	2016	20	1,604	96.23	%
Eagle Sky II	Bismarck, ND	2016	20	1,680	94.72	%
East Bridge	Fargo, ND	2017	58	6,490	96.18	%
Eastbrook	Bismarck, ND	2020	24	1,381	87.84	%
Echo Manor	Hutchinson, MN	2014	30	1,198	99.04	%
Eide Bailly Building***	Fargo, ND	2007	74,646	9,331	100.00	%
Emerald Court	Fargo, ND	2008	24	1,144	98.00	%
Essex	Fargo, ND	2017	18	928	87.97	%
Evergreen Terrace	Omaha, NE	2020	144	8,798	95.30	%
Fairview	Bismarck, ND	2008	84	5,467	95.34	%
Family Dollar Store	Mandan, ND	2010	9,100	874	100.00	%
First International Bank & Trust	Moorhead, MN	2011	3,510	1,037	100.00	%
Flagstone	Fargo, ND	2021	120	7,792	97.00	%
Flickertail	Fargo, ND	2008	180	8,151	92.73	%
Forest Avenue	Fargo, ND	2013	20	815	99.19	%
Four Points Office Building	Fargo, ND	2007	12,383	1,494	100.00	%
Foxtail Creek Townhomes	Fargo, ND	2020	30	1,488	96.21	%
Galleria III	Fargo, ND	2010	18	1,144	93.18	%
Garden Grove	Bismarck, ND	2016	95	7,274	92.78	%
Gate City Bank	Grand Forks, ND	2008	17,406	2,200	100.00	%
Georgetown	Fridley, MN	2014	468	33,586	89.63	%
Glen Pond	Eagan, MN	2011	528	44,377	95.38	%
Goldmark Office Park	Fargo, ND	2007	124,613	23,692	100.00	%
Grand Forks Marketplace**	Grand Forks, ND	2003	182,522	26,710	78.04	%
Granger Court	Fargo, ND	2013	59	2,841	96.07	%
Great American Insurance Building	Fargo, ND	2005	15,000	2,360	100.00	%
Guardian Building Products	Fargo, ND	2012	100,600	3,760	100.00	%
Hannifin	Bismarck, ND	2013	14	789	93.51	%
Harrison Richfield	Grand Forks, ND	2007	140	7,915	94.13	%
Hartford	Fargo, ND	2018	30	1,426	92.51	%
Hawn	Fargo, ND	2020	48	2,557	97.89	%
Highland Meadows	Bismarck, ND	2011	144	10,629	96.92	%
Hunter’s Run I	Fargo, ND	2007	12	483	97.71	%
Hunter’s Run II	Fargo, ND	2008	12	518	95.04	%
Huntington	Fargo, ND	2015	10	439	99.18	%
Islander	Fargo, ND	2011	24	1,407	96.76	%
Jadestone	Fargo, ND	2017	18	898	83.60	%
Kennedy	Fargo, ND	2013	12	813	99.62	%
Library Lane	Grand Forks, ND	2007	60	3,003	91.22	%
Madison (FKA Columbine)	Grand Forks, ND	2015	12	740	95.54	%
Maple Ridge	Omaha, NE	2008	174	10,822	96.57	%
Maplewood	Maplewood, MN	2014	240	17,626	94.12	%
Maplewood Bend	Fargo, ND	2009 and 2010	183	7,637	96.69	%
Martha Alice	Fargo, ND	2009	24	1,055	97.03	%
Mayfair (FKA Colony Manor)	Grand Forks, ND	2008	24	1,319	91.99	%
Midtown Plaza	Minot, ND	2004	17,808	1,345	77.48	%
Monticello	Fargo, ND	2013	18	989	97.25	%
Montreal Courts	Little Canada, MN	2013	444	30,686	94.51	%
Morningside	Fargo, ND	2018	17	803	98.40	%
Newgate	Bismarck, ND	2022	46	2,473	89.52	%
Oak Court	Fargo, ND	2008	81	3,118	96.48	%
Oakview Townhomes (FKA Arrowhead)	Grand Forks, ND	2017	82	6,004	97.75	%
O'Reilly Auto Store	Mandan, ND	2010	6,300	706	100.00	%
Oxford	Fargo, ND	2021	144	10,219	97.54	%
Pacific Park I	Fargo, ND	2013	30	1,064	95.51	%
Pacific Park II	Fargo, ND	2013	39	1,182	94.54	%
Pacific South	Fargo, ND	2013	15	607	96.37	%
Park Circle	Fargo, ND	2017	18	937	99.56	%
Parkview Arms	Bismarck, ND	2015	62	4,850	92.80	%
Parkway Office (FKA Echelon Building)	Fargo, ND	2006	17,000	1,954	100.00	%
Parkwest Gardens	West Fargo, ND	2014	142	8,292	96.10	%
Parkwood	Fargo, ND	2008	40	1,462	97.77	%
Pebble Creek	Bismarck, ND	2008	70	3,396	95.86	%

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Pinehurst	Fargo, ND	2021	210	14,982	95.31	%
Plumtree	Fargo, ND	2017	18	939	99.76	%
Prairiewood Court I & II	Fargo, ND	2006 and 2007	60	2,434	90.98	%
Prairiewood Meadows	Fargo, ND	2012	88	5,290	93.30	%
Prose	Fort Worth, TX	2022	270	55,690	75.19	%
Quail Creek	Springfield, MO	2015	164	11,236	95.51	%
Redpath	White Bear Lake, MN	2016	25,817	4,017	100.00	%
Robinwood	Coon Rapids, MN	2014	120	8,399	93.70	%
Rosedale Estates	Roseville, MN	2014	360	26,637	90.13	%
Rosegate	Fargo, ND	2008	90	3,608	94.55	%
Rosser	Bismarck, ND	2020	24	1,468	95.21	%
Roughrider	Grand Forks, ND	2016	12	699	92.64	%
Saddlebrook	West Fargo, ND	2008	60	1,804	97.04	%
Sage Park (FKA Brighton Village)	New Brighton, MN	2014	240	17,840	94.88	%
Sargent	Fargo, ND	2017	36	1,734	94.51	%
Schrock	Fargo, ND	2013	18	811	98.63	%
SE Maple Grove, LLC****	Maple Grove, MN	2021	161	32,079	59.28	%
SE Savage, LLC****	Savage, MN	2021	190	36,794	94.32	%
Sheridan Pointe	Fargo, ND	2013	48	2,945	94.96	%
Sierra Ridge	Bismarck, ND	2006 and 2011	136	11,165	97.83	%
Somerset	Fargo, ND	2008	75	4,027	96.32	%
Southgate	Fargo, ND	2007	162	6,581	98.26	%
Southview III	Grand Forks, ND	2011	18	776	89.31	%
Southview Village	Fargo, ND	2007	72	3,648	97.62	%
Spring	Fargo, ND	2013	25	1,053	98.80	%
Stanford Court	Grand Forks, ND	2013	96	4,864	90.35	%
Stonefield	Bismarck, ND	2014	192	30,096	97.87	%
Stony Brook	Omaha, NE	2009	148	11,599	95.45	%
Summerfield	Fargo, ND	2015	18	862	97.58	%
Summit Point	Fargo, ND	2015	87	7,005	97.86	%
Sunchase	Fargo, ND	2017	36	1,878	98.01	%
Sunset Ridge	Bismarck, ND	2008 and 2010	180	12,471	96.59	%
Sunview	Grand Forks, ND	2008	36	2,073	95.77	%
Sunwood Estates	Fargo, ND	2007	80	4,452	92.81	%
Thunder Creek	Fargo, ND	2018	57	5,391	94.37	%
Titan Machinery	Bismarck, ND	2015	22,293	3,448	100.00	%
Titan Machinery	Dickinson, ND	2012	17,760	1,790	100.00	%
Titan Machinery	Fargo, ND	2012	29,800	3,336	100.00	%
Titan Machinery	Marshall, MN	2011	67,600	5,081	100.00	%
Titan Machinery	Minot, ND	2012	23,690	2,630	100.00	%
Titan Machinery	North Platte, NE	2016	18,910	1,769	100.00	%
Titan Machinery	Sioux City, IA	2013	36,332	4,567	100.00	%
Trustmark	Fargo, ND	2020	45,755	13,425	100.00	%
Twin Oaks	Hutchinson, MN	2014	80	4,470	97.75	%
Twin Parks	Fargo, ND	2008	66	2,596	98.76	%
Valley Homes Duplexes	Grand Forks, ND	2015	24	2,572	93.45	%
Valley View	Golden Valley, MN	2014	72	7,820	98.99	%
Village Park	Fargo, ND	2008	60	2,416	98.82	%
Village West	Fargo, ND	2008	80	2,987	95.82	%
Walgreens	Alexandria, LA	2009	14,560	4,296	100.00	%
Walgreens	Batesville, AR	2009	14,820	7,616	100.00	%
Walgreens	Denver, CO	2011	13,390	5,210	100.00	%
Walgreens	Fayetteville, AR	2009	14,550	5,810	100.00	%
Walgreens	Laurel, MS	2010	14,820	4,542	100.00	%
Washington	Grand Forks, ND	2016	17	745	94.30	%
Wells Fargo Building	Duluth, MN	2007	95,961	10,801	55.24	%
West Oak	Fargo, ND	2017	18	869	97.94	%
Westcourt	Fargo, ND	2014	64	3,710	93.43	%
Westside	Hawley, MN	2010	14	544	90.67	%
Westwind	Fargo, ND	2008	18	633	91.87	%
Westwood Estates	Fargo, ND	2008	200	8,277	93.58	%
Willow Park	Fargo, ND	2008	102	6,767	94.94	%
Wolf Creek	Fargo, ND	2020	54	5,364	99.18	%
Woodland Pines (FKA Fredericksburg)	Omaha, NE	2018	173	13,250	95.21	%

* 70.00% ownership interest

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** 66.67% ownership interest

*** 50.00% ownership interest

**** 60% ownership interest

Geography

Of our 185 properties, 142 are located in North Dakota, with 89 being located in the greater Fargo, North Dakota and Moorhead, Minnesota metropolitan statistical area. The North Dakota region generated approximately 51.9% of our rental revenue for the year ended December 31, 2022.

The following table presents the total real estate investment amount by state and annual rental revenue by state, as of the year ended December 31, 2022 (in thousands):


	Real Estate				Rental
State	Investment		%		Revenue		%
North Dakota	$	510,127	52.5	%	$	70,132	51.9	%
Minnesota		305,463	34.6	%		51,314	38.0	%
Other		155,558	16.0	%		13,614	10.1	%
	$	971,148	103.1	%	$	135,060	100.0	%

Economy

The North Dakota workforce is concentrated in agricultural, energy, information technology, aerospace sciences and medical sciences. According to the U.S. Census Bureau, the 2022 estimated combined population of the Fargo, West Fargo and Moorhead metro area was 210,903 people.

The following chart depicts the difference in unemployment rates between North Dakota and the national average for 2022:


	Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec
National ⁽¹⁾	4.0	%	3.8	%	3.6	%	3.6	%	3.6	%	3.6	%	3.5	%	3.7	%	3.5	%	3.7	%	3.6	%	3.5	%
North Dakota⁽¹⁾	3.1	%	2.9	%	2.9	%	2.8	%	2.6	%	2.5	%	2.3	%	2.3	%	2.2	%	2.3	%	2.3	%	2.3	%

(1)	Seasonally adjusted

Source: Bureau of Labor Statistics

Acquisitions and Dispositions

We had eight acquisitions and five dispositions of property during the year ended December 31, 2022. We had five acquisitions and two dispositions of property during the year ended December 31, 2021. We had nine acquisitions and three dispositions of property during the year ended December 31, 2020.

Capitalization rates are a key decision-making item used by the Board. In making acquisitions, the Board currently targets capitalization rates between 6.0 to 10.0%, depending on the amount of risk involved. For those properties with greater risk, the Board targets greater capitalization rates (9.0% or greater). For those properties exhibiting less risk, a lower capitalization risk is acceptable. For potential acquisitions, the Board also requires an adequate spread between the financing on the property and the capitalization rate. Capitalization rates for acquisitions are calculated using projected net operating income divided by the investment. Net operating income is calculated by taking GAAP net income and adding back depreciation, amortization, and interest expense. Capitalization rates for dispositions are calculated in the same way with the exception of using historical, rather than projected, net operating income. The market has seen an increase in investors, driving up overall acquisition prices, thus lowering capitalization rates below the target thresholds set by the Board.

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We use historical occupancy, rental income, and expenses to calculate projected net operating income for potential real estate investments. For residential properties, we make various assumptions about future rents, occupancy levels, and expenses based on historical financial information and our assessment of the property’s future potential. The projected NOI for residential acquisitions is typically based on historical occupancy and expenses over a three-to-five year period. When historical information is unavailable, market vacancy and credit loss factors are estimated.

For commercial and residential properties, assumptions regarding rental income and expenses are based on the terms of the in-place leases and available historical financial information which is then used to generate projected net operating income.

Numerous estimates and assumptions are necessary to generate projected net operating income for potential commercial and residential acquisitions, and there is no guarantee actual net operating income will equal projected net operating income.

Tenants

Our tenants are varied and consist of individuals and national, regional, and local businesses. Our commercial properties generally attract a mix of tenants. In 2022, 2021 and 2020, no single tenant represented more than 10% of our revenues. We have investments in several types of real estate, including multifamily, retail, office, industrial, and medical. Within our office, retail, and industrial properties, we have over 100 tenants who operate in numerous industries, including restaurants, pharmacy, medical, financing, banking, insurance, professional services, technology, wholesale and direct retail.

Lease Expirations

The vast majority of residential leases are for one-year periods. The following table lists a summary, as of December 31, 2022, of lease expirations on non-residential properties scheduled to occur during each of the ten calendar years from 2023 to 2032 and thereafter, assuming that tenants exercise no renewal options or early termination rights. Base rents do not include CAM (common area maintenance).

The table is based on leases on December 31, 2022 for our non-residential properties including our unconsolidated affiliates (in thousands, except leasable area data).


	# of Leases	Gross	% of Gross		Expiring		% of Total
Lease Expiration Year	Expiring	Leasable Area	Leasable Area		Base Rent		Base Rent
Month-to-Month	0	—	0.00	%	$	—	0.00	%
2023	7	23,335	1.81	%		234,781	1.05	%
2024	19	156,445	12.16	%		828,540	3.72	%
2025	13	142,130	11.05	%		831,440	3.73	%
2026	11	150,378	11.69	%		1,136,265	5.10	%
2027	13	128,878	10.02	%		2,695,716	12.09	%
2028	7	69,390	5.39	%		1,038,051	4.65	%
2029	5	86,532	6.73	%		484,989	2.17	%
2030	13	147,113	11.43	%		1,994,416	8.94	%
2031	3	111,196	8.64	%		1,314,405	5.89	%
2032	8	181,795	14.13	%		1,668,691	7.48	%
Thereafter	7	89,384	6.95	%		10,072,420	45.18	%
Leased Total	106	1,286,576	100.00	%	$	22,299,714	100.00	%

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Mortgage Notes Secured by the Properties

On December 31, 2022, we had $508,305 in mortgage notes payable with respect to our properties. Principal payments on these notes are payable as follows (in thousands):


Years ending December 31,	Amount
2023	$	53,341
2024		22,376
2025		53,130
2026		45,546
2027		77,845
Thereafter		256,067
	$	508,305

Insurance

We believe we have adequate property damage, fire loss and liability insurance on all of our properties with reputable, commercially rated companies. We also believe our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount we believe to be adequate.

Regulations

Our properties, as well as any other properties we may acquire in the future, are subject to various federal, state, and local laws, ordinances and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe we have all permits and approvals necessary under current law to operate our properties.

ITEM 3. LEGAL PROCEEDINGS

The Company 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common shares of beneficial interest are not listed on any national exchange or over-the-counter market or quoted on any national securities market, and we currently do not have plans to list or have our common shares quoted.

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Shareholders and Unit Holders

As of March 14, 2023, we had 10,947,790, common shares of beneficial interests outstanding, held by a total of 1,122 common shareholders and no outstanding options or warrants to purchase our common shares.

In addition, as of March 14, 2023, there were approximately 18,687,896 limited partnership units of our operating partnership outstanding held by approximately 529 limited partners. Pursuant to the exchange rights under the LLLP Agreement of the operating partnership, we have the option, upon redemption requests by the holders of the limited partnership units, to acquire the limited partnership units by paying the holders with our common shares of beneficial interest in lieu of delivering cash. The numbers of common shareholders and limited partners is based on the Company’s records. There is no public trading market for our common shares or the limited partnership units of our Operating Partnership.

Quarterly Dividend Data

We have declared and intend to continue to declare regular quarterly dividends to our common shareholders. Because all of our operations are conducted through our operating partnership, our ability to pay dividends depends on the operating partnership’s ability to make distributions to us and its other limited partners. We pay declared dividends quarterly, whereby the dividend attributable to a calendar quarter would be paid during the first month of the next quarter. Dividends will be paid to common shareholders as of the record dates selected by the Board of Trustees. We intend to make dividends sufficient to satisfy the requirements for qualification as a REIT for federal tax purposes.

The following tables show the dividends we have declared (including the total amount paid on a per share basis, paid in cash, reinvested in shares of our common stock pursuant to the Dividend Reinvestment Plan, and the total amount paid) during the last two fiscal years (in thousands, except per share data).


	Dividends Per				Reinvested
2022 Quarter Ended	Common Share		Cash		via DRP		Total Dividends
December 31	$	0.287500	$	1,146	$	1,962	$	3,108	^(a)
September 30	$	0.287500		1,097		1,973		3,070
June 30	$	0.287500		1,127		1,910		3,037
March 31	$	0.287500		1,130		1,877		3,007
			$	4,500	$	7,722	$	12,222


	Dividends Per				Reinvested
2021 Quarter Ended	Common Share		Cash		via DRP		Total Dividends
December 31	$	0.265000	$	1,024	$	1,716	$	2,740	^(a)
September 30	$	0.265000		927		1,780		2,707
June 30	$	0.265000		928		1,743		2,671
March 31	$	0.265000		963		1,679		2,642
			$	3,842	$	6,918	$	10,760

(a)	Fourth quarter dividends paid on January 17^th of the following year, for the year ended December 31, 2022. Fourth Quarter dividends were paid on January 18^th of the following year, for the year ended December 31, 2021.

The Trust expects that future dividends will be maintained at least at the present rate, unless there are changes in our results of operations, our general financial condition, general economic conditions, or the Board determines other action prudent.

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Sale of Securities

During the year ended December 31, 2022, the Operating Partnership issued approximately 560,000 limited partnership units valued at $23 per unit for an aggregate consideration of $12,870, for the purchase of real estate investments. The units were sold to accredited investors unaffiliated with the Operating Partnership in private placement transactions exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of such Act. Limited Partners may request, in accordance with the requirements of the redemptions plans, the redemption of their limited partnership units for cash or the exchange of their limited partnership units for common shares of the Trust in lieu of cash for the redemption on a basis of one limited partnership unit for one common share. At the sole and absolute discretion of the Operating partnership, and so long as our redemption plans exist and applicable conditions and limitations are satisfied, the Trust may, acting for itself or in its capacity as General Partner of the Operating Partnership, elect to redeem or exchange such limited partnership units.

Other Sales

During the years ended December 31, 2022, 2021 and 2020, there were no common shares of the Trust issued in exchange for limited partnership units of the operating partnership.

Redemptions of Securities

Set forth below is information regarding common shares and limited partnership units redeemed during the year ended December 31, 2022


			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
October 1-31, 2022	1,000	—	$	21.85	1,501,000	1,147,000	$	14,870
November 1-30, 2022	1,000	4,000	$	21.85	1,502,000	1,151,000	$	14,750
December 1-31, 2022	—	3,000	$	21.85	1,502,000	1,154,000	$	14,684
Total	2,000	7,000

For the year ended December 31, 2022, the Trust redeemed all shares or units for which we received redemption requests. In addition, for the year ended December 31, 2022, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan, effective January 1, 2022, permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our Operating Partnership, up to an aggregate amount of $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 December 31, 2022, was $14,684. The redemption price for such shares and units redeemed under the plan was fixed at $21.85 per share or unit, which became effective 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 6. SELECTED FINANCIAL DATA

None.

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ITEM 7. 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-K 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. Please see “Note Regarding Forward-Looking Statements” and “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.

Introduction

The following discussion should be read in conjunction with the financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") within this section is focused on the years ended December 31, 2022 and 2021, including year-to-year comparisons between these years. Our MD&A for the year ended December 31, 2020, including year-to-year comparisons between 2021 and 2020, can be found in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Overview

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 a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation. Our real estate portfolio consisted of 185 properties containing 11,300 apartment units and approximately 1,498,000 square feet of leasable commercial space as of December 31, 2022. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $776,299, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.

Critical Accounting Policies and Estimates

Below are the accounting policies and estimates that management believe are critical to the preparation of the audited consolidated financial statements included in this Report. Certain accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see note 2 to the audited consolidated financial statements). These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.

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Impairment of Real Estate Investments

The 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 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 negative cash flows;

Continued low occupancy rates;

Continued difficulty in leasing space;

Significant financially troubled tenants;

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

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

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

If the presence of one or more impairment indicators as described above is identified 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 Trust makes complex or subjective assumptions which include, but are not limited to:

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

Projected capital expenditures;

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

Comparable selling prices; and

Property specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value. Based on evaluation, there was one impairment loss of $561 during the year ended December 31, 2022. There were no impairment losses during the years ended December 31, 2021 and 2020.

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the year ended December 31, 2022 included elsewhere in this report.

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.

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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

Principal Business Activity

The operating partnership currently directly owns 185 properties. Of these, 143 are residential properties located in North Dakota, Minnesota, Missouri, Nebraska and Texas and are principally multifamily apartment buildings. The remaining 42 are 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 $776,299 at December 31, 2022. 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 December 31, 2022:


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

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Management Highlights

●

Increased revenues from rental operations by $5,736 or 4.4% for the year ended December 31, 2022, compared to the year ended December 31, 2021.

●

Eight properties with a total cost of $94,844 were acquired during the year ended December 31, 2022.

●

Disposed of two residential and three commercial properties during the year ended December 31, 2022.

●

Declared dividends aggregating $1.1500 per common share for the year ended December 31, 2022.

Results of Operations for the Years Year Ended December 31, 2022 and 2021


	Year ended December 31, 2022						Year ended December 31, 2021
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	113,968	$	21,092	$	135,060	$	107,284	$	22,040	$	129,324
Real Estate Expenses
Real Estate Taxes		11,734		2,511		14,245		10,778		2,928		13,706
Property Management		13,778		789		14,567		12,907		1,217		14,124
Utilities		10,901		1,274		12,175		9,031		1,104		10,135
Repairs and Maintenance		24,479		1,812		26,291		21,571		1,956		23,527
Insurance		3,755		105		3,860		3,167		110		3,277
Total Real Estate Expenses		64,647		6,491		71,138		57,454		7,315		64,769
Net Operating Income	$	49,321	$	14,601		63,922	$	49,830	$	14,725		64,555
Interest						19,994						18,142
Depreciation and amortization						24,679						22,203
Administration of REIT						5,247						4,381
Other income						(10,530)						(4,609)
Net Income					$	24,532					$	24,438

Net Income Attributed to:
Noncontrolling Interest					$	15,611					$	15,644
Sterling Real Estate Trust					$	8,921					$	8,794
Dividends per share⁽¹⁾					$	1.1500					$	1.0600
Earnings per share					$	0.8400					$	0.8700
Weighted average number of common shares						10,632						10,160

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

Revenues

Property revenues totaled approximately $135,060 for the year ended December 31, 2022, which constituted an increase of approximately $5,736 or 4.4% compared to the same period in 2021. Residential property revenues increased approximately $6,684 and commercial property revenues decreased approximately $948.

The following table illustrates the occupancy percentage for the periods ended indicated:


	December 31,		December 31,
	2022		2021
Residential occupancy	93.2	%	94.8	%
Commercial occupancy	87.0	%	80.7	%

Residential revenues for the year ended December 31, 2022, increased $6,684 or 6.2%, in comparison to the same period in 2021. Residential properties acquired since January 1, 2021, contributed approximately $5,232 to the increase in total

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residential revenues. The remaining increase is due to decreased rental incentives caused by increased renewals and general market rent increases at our stabilized properties. Residential revenues comprised 84.4% of total revenues for the year ended December 31, 2022 compared to 83.0% of total revenues for the year ended December 31, 2021. Residential economic occupancy year-over-year decreased 1.6%, during the year ended December 31, 2022.

For the year ended December 31, 2022, total commercial revenues decreased $948 or 4.3%, in comparison to the same period in 2021. The decrease was primarily attributed to the disposition of three commercial properties which accounts for $772 of the decrease during the year ended December 31, 2022 The remaining difference in commercial revenues is related to early termination fees which decreased $173 for the year ended December 31, 2022, as compared to the same period in 2021. The early termination fees will vary from year to year and are dependent on operational leases on commercial properties.

Expenses

Residential expenses from operations of $64,647 during the year ended December 31, 2022 increased $7,193 or 12.5% in comparison to the same period in 2021. The increase is attributed to an increase in repairs and maintenance expense of $2,908 or 13.5%. Properties acquired since January 1, 2021, attributed $937 to the increase in repairs and maintenance expense. Additionally, increased project and upgrade costs, that are considered to be deferred maintenance costs from the year ended 2021, due to COVID-19 restrictions attribute to the increase in repairs and maintenance expense during the year ended December 31, 2022. The increase is also attributed to an increase in property management fees of $871 or 6.7%, an increase in utility expense of $1,870 or 20.7%, as well as an increase in real estate taxes of $956 or 8.9%. The main reason for the increases in property management fees, utility expenses and real estate taxes is related to the properties acquired since January 1, 2021, which account for $665, $559 and $529 of the increase, respectively.

Commercial expenses from operations of $6,491 during the year ended December 31, 2022 decreased $824 or 11.3% in comparison to the same period in 2021. For the year ended December 31, 2022 property management fees decreased by $428 or 35.2%. The decrease is also attributable to a decrease in advertising and marketing expenses in an office building located in Minneapolis, Minnesota in efforts to lease up vacant space. The decrease is also attributed to a decrease in real estate taxes of $417 or 14.2%, due to a property in Minneapolis, Minnesota receiving a real estate tax refund and property in Fargo, ND whose tenant is responsible for real estate taxes in 2022.

Interest expense of $19,994 during the year ended December 31, 2022 increased $1,852 or 10.2% in comparison to the same period in 2021. Interest expense related to financing activities increased by $1,677 during 2022. One property in Minnesota had a secondary mortgage taken out which attributes to $1,036 of the increase. Capitalized interest expense related to construction in progress decreased $154 during the year ended December 31, 2022.

Depreciation and amortization expense of $24,679 during the year ended December 31, 2022 increased $2,476 or 11.2% in comparison to the same period in 2021. Properties acquired since January 1, 2021, contributed approximately $2,122 to the increase in depreciation expense, which is offset by $206 of reduced depreciation expense related to the disposition of four properties during the year ended December 31, 2022. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the years ended December 31, 2022 and 2021 were relatively consistent at 18.3% and 17.2%, respectively.

REIT administration expenses of $5,249 for the year ended December 31, 2022, increased $866 or 19.8% in comparison to the same period in 2021, which is attributed to two joint venture’s development fee of $600 in 2022, and an increase in REIT advisory fees paid of $335.

Other income of $10,530 for the year ended December 31, 2022 increased $5,921 or 128.5% in comparison to the same period in 2021. The increase is primarily attributed to the sale of three commercial and two residential properties for $11,090 in 2022 as compared to only one commercial and one residential properties in 2021 for $1,710. This is offset by the increase in net loss allocations from Sterling’s ownership in six joint ventures for $2,078 in 2022.

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Furthermore, the increase is offset by the Trust receiving $1,000 from related parties, in reimbursement for expenses paid that were associated with capital projects in 2021.

Construction in Progress and Development Projects

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

Construction in progress as of December 31, 2022, consists primarily of construction at several residential properties located in North Dakota and Minnesota. The Prairiewood Meadows construction consists of the re-development of one building due to a fire, a new clubhouse for residents, and parking lot repairs. Current expectations are that the projects will be completed in the first quarter of 2023, and the current budget approximates $3,683, of which $3,085 has been incurred and is included in construction in progress. The Rosedale Estates project is primarily related to a new parking structure. Current expectations are the project will be completed in the first quarter of 2024, and the current budget is approximately $5,142, of which $129 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.

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 the current project budget approximates $53,138 of which $37,714 has been incurred as of December 31, 2022.

Kessler Apartments, currently being developed in Fort Worth, Texas is expected to be completed in the third quarter of 2024 and the current project budget approximates $55,000 of which $8,709 has been incurred as of December 31, 2022.

Funds From Operations (FFO)

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

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

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

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

While FFO 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 or calculate FFO in the same way. The FFO reconciliation presented here is not necessarily comparable to FFO presented by other real estate investment trusts. FFO 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 applicable to common shares and limited partnership units does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of sufficient cash flow to fund a real estate investment trust’s needs or its ability to service indebtedness or to pay dividends to shareholders.

The following tables include calculations of FFO, and the reconciliations to net income, for the years ended December 31, 2022, 2021 and 2020, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

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


	Year ended December 31, 2022			Year ended December 31, 2021			Year ended December 31, 2020
			Weighted Avg			Weighted Avg			Weighted Avg
			Shares and			Shares and			Shares and
	Amount		Units	Amount		Units	Amount		Units

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	8,921	10,632	$	8,794	10,160	$	9,405	9,694

Add back:
Noncontrolling Interest - Operating Partnership Units		15,628	18,626		15,783	18,235		17,645	18,187
Depreciation & Amortization from continuing operations		24,679			22,203			21,214
Pro rata share of unconsolidated affiliate depreciation and amortization		3,312			718			380
Loss on impairment of real estate investments		561			—			—
Subtract:
Gain on sale of depreciable real estate		(11,090)			(1,710)			(3,383)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	42,011	29,258	$	45,788	28,395	$	45,261	27,881

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Liquidity and Capital Resources

Evaluation of Liquidity

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

Our principal demands for funds will be for the: (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions, (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption 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 from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary.

At December 31, 2022, our unrestricted cash resources consisted of cash and cash equivalents totaling $3,257. 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 $107,577, which could potentially be used as collateral to secure additional financing in future periods.

The Trust has a $4,915 variable rate (SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in December 2026; and a $5,000 variable rate (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 December 31, 2022, the Bremer lines of credit secured one letter of credit totaling $50, leaving $8,857 available and unused under the agreements. The Trust anticipates renewing the line of credit expiring in the next 12 months to continue to 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 us.

During the year ended December 31, 2022, we did not sell any common shares in private placements. During the year ended December 31, 2022, we issued 342,000 and 177,000 common shares under the dividend reinvestment plan and optional share purchases, respectively which raised gross proceeds of $11,531. During the year ended December 31, 2021, we did not sell any common shares in private placements. During the year ended December 31, 2021, we issued 363,000 and 203,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively which raised gross proceeds of $10,952.

Additionally, to reduce our cash investment and liquidity needs, the Trust utilizes the UPREIT structure whereby we can acquire property in whole or in part by issuing partnership units in lieu of cash payments. During the year end December 31, 2022, the operating partnership issued approximately 560,000 limited partnership units of the operating partnership valued at $23.00 per unit for an aggregate consideration of approximately $12,870 for the purchase of real estate investments. During the year end December 31, 2021, the Trust issued approximately 144,000 limited partnership units of the operating partnership valued at $20.00 per unit for an aggregate consideration of approximately $2,883 for the purchase of real estate investments.

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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 the Company’s needs for at least the next 12 months and as appropriate, we will use cash flows from operations, net proceeds from share offerings, debt proceeds, and proceeds from the disposition of real estate investments to meet long term liquidity demands.

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.

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 operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our properties’ performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.

Lease Expirations and Occupancy

Our residential leases are for a term of one year or 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.

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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 have funded 100% of dividends paid with 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.


	Year Ended
	December 31,
	2022		2021

	(in thousands)
Net cash flows provided by operating activities	$	40,770	$	45,055
Net cash flows used in investing activities	$	(107,960)	$	(59,141)
Net cash flows provided by financing activities	$	19,114	$	47,107

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 $40,770 and $45,053 for the years ended December 31, 2022 and 2021, respectively, which consists primarily of net income from property operations, adjusted for non-cash depreciation and amortization.

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.

Net cash used in investing activities was $107,960 and $59,119 for the years ended the year ended December 31, 2022 and 2021, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the years ended December 31, 2022 and 2021, cash flows used in investing activities related specifically to the acquisition of properties and capital expenditures was $91,600 and $53,900, respectively. For the years ended December 31, 2022 and 2021, cash flows used in investing activities related to the purchase of securities was $29,130 and $-, respectively. Proceeds received from the sale of real estate investments during the years ended December 31, 2022 and 2021, offset this amount by $25,463 and $5,610, respectively.

Financing Activities

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

Net cash provided by financing activities was $19,114 and $47,107, respectively, for the years ended December 31, 2022 and 2021. During the year ended December 31, 2022, we paid $25,310 in dividends and distributions, redeemed $2,077 of shares and units, received $26,500 from a note payable, received $37,569 from new mortgage notes payable, and made mortgage principal payments of $22,231. For the year ended December 31, 2021, we paid $22,622 in dividends and distributions, redeemed $5,566 of shares and units, received $116,180 from new mortgage notes payable, and made mortgage principal payments of $43,641.

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Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 2022, to December 31, 2022 totaling $12,222 or $1.1500 per share, of which $4,507 was cash dividends and $7,715 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $40,770 from our cash flows from operations.

We declared cash dividends to our shareholders during the period from January 1, 2021, to December 31, 2021 totaling $10,761 or $1.0600 per share, of which $3,842 was cash dividends and $6,918 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $45,053 from our cash flows from 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.

The following table presents certain information regarding our dividend coverage:


	Year Ended
	December 31,
	2022		2021

	(in thousands)
Cash flows provided by operations (includes net income of $24,532 and $24,438, respectively)	$	40,770	$	45,055
Distributions in excess of earnings received from unconsolidated affiliates		504		—
Gain on sales of real estate and non-real estate investments		10,529		1,710
Dividends declared		(12,222)		(10,760)
Excess	$	39,581	$	36,005

Limited Partnership Units

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

For the year ended December 31, 2022, we declared quarterly distributions totaling $21,482 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, and October 17, 2022, and January 17, 2023. Distributions were paid at a rate of $0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the year ended December 31, 2021, we declared quarterly distributions totaling $19,319 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, October 15, 2021, and January 18, 2022. Distributions were paid at a rate of $0.2650 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

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Sources of Dividends and Distributions

For the year ended December 31, 2022, we paid aggregate dividends of $11,854, which were paid with cash flows provided by operating activities. Our funds from operations, or FFO, was $42,011, therefore, our management believes our distribution policy is sustainable over time. For the year ended December 31, 2021, we paid aggregate dividends of $10,629 which were paid with cash flows provided by operating activities. Our FFO was $45,788 for the year ended December 31, 2021. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Principal Activity and Significant Accounting Policies— Recently Issued Accounting Pronouncements, to the consolidated financial statements that are a part of this Annual Report on Form 10-K.

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Recent Developments

On January 17, 2023, we paid a dividend or distribution of $0.2875 per share on our common shares of beneficial interest or limited partnership units, to common shareholders and limited unit holders of record on December 31, 2022.

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.

ITEM 7A. QUANTITATIVE AND 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 year ended December 31, 2022, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. These swaps have an aggregated notional amount of $106,033 for the year ended December 31, 2022. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.

As of December 31, 2022, The Trust had $106,033 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 interest rate risk, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt or future debt.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature pages.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Sterling Real Estate Trust’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Sterling Real Estate Trust’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on the evaluation, Sterling Real Estate Trust’s Chief Executive Officer and Chief Financial Officer have concluded that Sterling Real Estate Trust’s disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’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.

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Report of Management on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our internal control system was designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements. The system of internal control over financial reporting provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The framework upon which management relied in evaluating the effectiveness of our internal control over financial reporting was set forth in Internal Controls – Integrated Framework (2013) published by the Committee of Sponsoring Organization of the Treadway Commission.

Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets,

ii.

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorization of our management and trustees; and

iii.

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2022. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our policies or procedures may deteriorate.

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Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the fourth quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) is incorporated by reference to our definitive proxy statement for the 2023 Annual Meeting of Shareholders to be filed with the SEC or filed by amendment to this Annual Report on or before May 1, 2023.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The financial statements listed below are included in this report

Reports of Independent Registered Public Accounting Firms (PCAOB ID Number 49 and PCAOB ID Number 23)

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2022 and 2021

Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020

Notes to Consolidated Financial Statements

Real Estate and Accumulated Depreciation (Schedule III)

(a)(3) Exhibits

See the Exhibit Index filed as part of this Annual Report on Form 10-K.

ITEM 16. FORM 10-K SUMMARY

Not applicable.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021,

AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND

OTHER COMPREHENSIVE INCOME, SHAREHOLDERS’ EQUITY AND CASH FLOWS

FOR THE YEARS ENDED

DECEMBER 31, 2022, 2021 AND 2020,

INCLUDING NOTES

and

REPORTS OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES


		PAGE
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS		51


CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets		55
Consolidated Statements of Operations and Other Comprehensive Income		56
Consolidated Statements of Shareholders’ Equity		57
Consolidated Statements of Cash Flows		58
Notes to Consolidated Financial Statements		60
Real Estate and Accumulated Depreciation (Schedule III)		85

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Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Trustees of Sterling Real Estate Trust

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sterling Real Estate Trust and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and other comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.Evaluation of real estate investments for impairment

The Company’s real estate investments and related intangible assets were $776.3 million and $5.3 million, respectively, as of December 31, 2022. As described in Note 2, the Company performs impairment testing on a quarterly basis or whenever events or changes in circumstances indicate the carrying amount of its real estate investments may not be recoverable. As part of the Company’s impairment indicator analysis, management considers numerous potential indicators of impairment of operating properties. These indicators could include a substantial decline in or continued low occupancy rate, continued difficulty in leasing space, significant financially troubled tenants, a change in plan to sell a property prior to the end of its useful life or holding period, a significant decrease in market price not in line with general market trends, and any other quantitative or qualitative events or factors deemed significant by the Trust’s management or board of trustees. The Company identified indicators of impairment for certain real estate investments and, in such cases, further assessed the assets for recoverability by comparing the net carrying value to estimated future cash flows on an undiscounted basis.

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We identified the determination of the existence of impairment indicators for the Company’s real estate investments and related intangible assets as a critical audit matter because of the significant judgments made by management, including the evaluation of the impact of the factors described above. Auditing management’s judgments used in the determination of impairment indicators involved a high degree of auditor judgment and increased audit effort. Further, auditing the Company’s undiscounted cash flow model required a high degree of auditor judgment and increased audit effort as estimates underlying the calculation, including terminal capitalization rates, were based on assumptions affected by expected future market and economic conditions.

Our audit procedures related to the Company’s evaluation of real estate investments for impairment included the following, among others.

We tested the underlying data used in management’s analysis for completeness and accuracy, agreed such data to source documents and the underlying accounting records and evaluated management’s conclusions around potential indicators of impairment.

We evaluated the accuracy of management’s conclusions around potential indicators of impairment by developing an independent expectation of potential impairment indicators on a property by property basis, considering information such as historical trends, current year property level operating performance, and changes in expected hold periods, among others, and compared our expectation to management’s analysis.

For the Company’s real estate investments that were assessed by management using an undiscounted cash flow model, we inspected relevant industry data to consider market conditions. Further, we tested that the significant assumptions utilized in estimating property undiscounted cash flows, such as terminal capitalization rates, were within an observable market range.

Evaluation of purchase price allocation of real estate acquisitions

As described in Note 2 and 19 to the consolidated financial statements, the transaction consideration exchanged in the Company’s real estate acquisitions during 2022 amounted to $94.8 million. The transactions were accounted for as asset acquisitions and resulted in the Company recording approximately $9.9 million of land and land improvements, approximately $83.6 million of building and improvements and approximately $1.3 million of other net assets and assumed liabilities. Management allocates the purchase price in an asset acquisition to the assets acquired and liabilities assumed based upon their estimated relative fair values at the date of the acquisition.

We identified the allocation of the purchase price to the assets acquired and liabilities assumed in the asset acquisitions referred to above as a critical audit matter because of the significant judgments made by management when determining the estimates of fair value of certain assets acquired. Auditing management’s estimates and judgments involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists, due to the impact these estimates have on the allocation of the purchase price.

Our audit procedures related to the allocation of the purchase price to the assets acquired and liabilities assumed in the asset acquisitions referred to above included the following, among others:

●

We obtained and read the purchase agreements.

●

We tested the underlying data used in management’s fair value estimates for completeness and accuracy and agreed the inputs to source documents.

●

We utilized valuation specialists to assist in performing the following procedures:

Evaluated the appropriateness of the valuation methodology utilized by management to estimate fair value.

Obtained independently sourced market data for certain significant assumptions, including comparable land sales, market rent, discount rates and capitalization rates, among others, and compared them to management’s estimates.

Assessed the reasonableness and recalculated management’s allocation of the purchase price to the assets acquired and liabilities assumed.

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/s/ RSM US LLP

We have served as the Company’s auditor since 2021.

Minneapolis, Minnesota

March 15, 2023

PCAOB ID: 49

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Report of Independent Registered Public Accounting Firm

To the Shareholders, the Audit and Disclosure Committee, and the Board of Trustees of Sterling Real Estate Trust:

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of operations and other comprehensive income, shareholders’ equity and cash flows of Sterling Real Estate Trust (the "Company") for the year ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Baker Tilly US, LLP

We served as the Company’s auditor from 2013 until 2021.

Chicago, Illinois

March 31, 2021

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of December 31, 2022 and 2021


	December 31,		December 31,
	2022		2021

	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	129,682	$	125,338
Building and improvements		834,356		763,003
Construction in progress		7,110		8,361
Real estate investments		971,148		896,702
Less accumulated depreciation		(194,849)		(179,155)
Real estate investments, net		776,299		717,547
Cash and cash equivalents		3,257		51,507
Restricted deposits		9,323		9,149
Investment in securities		29,371		—
Investment in unconsolidated affiliates		29,423		18,658
Notes receivable		8,448		7,457
Lease intangible assets, less accumulated amortization		5,290		6,246
Other assets, net		27,312		10,302

Total Assets	$	888,723	$	820,866

LIABILITIES
Mortgage notes payable, net	$	506,167	$	493,142
Notes payable		26,500		—
Lines of credit		1,008		—
Dividends payable		8,493		7,567
Tenant security deposits payable		6,368		5,225
Lease intangible liabilities, less accumulated amortization		646		811
Accrued expenses and other liabilities		16,075		18,604
Total Liabilities		565,257		525,349

COMMITMENTS and CONTINGENCIES - Note 17

SHAREHOLDERS' EQUITY
Beneficial interest		123,996		116,856
Noncontrolling interest
Operating partnership		183,048		176,954
Partially owned properties		2,640		2,657
Accumulated other comprehensive income (loss)		13,782		(950)
Total Shareholders' Equity		323,466		295,517

	$	888,723	$	820,866

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 and 2020


	Year Ended
	December 31,
	2022		2021		2020

	(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	135,060	$	129,324	$	124,616
Expenses
Expenses from rental operations
Operating expenses		56,893		51,063		47,071
Real estate taxes		14,245		13,706		12,498
Depreciation and amortization		24,679		22,203		21,214
Interest		19,994		18,142		17,097
		115,811		105,114		97,880
Loss on impairment of property		561		—		—
Administration of REIT		5,247		4,381		4,217
Total expenses		121,619		109,495		102,097
Income from operations		13,441		19,829		22,519

Other income
Equity in (losses) gains of unconsolidated affiliates		(2,339)		(261)		263
Other income		1,293		1,935		455
Gain on sale or conversion of real estate investments		11,090		1,710		3,383
Gain on involuntary conversion		1,047		1,225		360
Total other income		11,091		4,609		4,461
Net income	$	24,532	$	24,438	$	26,980
Net income attributable to noncontrolling interest:
Operating partnership		15,628		15,783		17,645
Partially owned properties		(17)		(139)		(70)
Net income attributable to Sterling Real Estate Trust	$	8,921	$	8,794	$	9,405

Net income attributable to Sterling Real Estate Trust per common share, basic and diluted	$	0.84	$	0.87	$	0.97

Comprehensive income:
Net income	$	24,532	$	24,438	$	26,980
Other comprehensive gain (loss) - change in fair value of interest rate swaps		14,732		855		(1,842)
Comprehensive income		39,264		25,293		25,138
Comprehensive income attributable to noncontrolling interest		24,989		16,193		16,373
Comprehensive income attributable to Sterling Real Estate Trust	$	14,275	$	9,100	$	8,765

Weighted average common shares outstanding, basic and diluted		10,632		10,160		9,694

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020


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

	(in thousands)
BALANCE AT DECEMBER 31, 2019	9,436	$	131,261	$	(28,888)	$	102,373	$	174,221	$	2,416	$	37	$	279,047
Shares issued under trustee compensation plan	3		64		—		64		—		—		—		64
Contribution of assets in exchange for the issuance of noncontrolling interest shares	—		—		—		—		10,293		—		—		10,293
Shares/units redeemed	(127)		(2,321)		—		(2,321)		(1,216)		—		—		(3,537)
Dividends and distributions declared	—		—		(10,256)		(10,256)		(19,322)		—		—		(29,578)
Dividends reinvested - stock dividend	356		6,511		—		6,511		—		—		—		6,511
Issuance of shares under optional purchase plan	187		3,590		—		3,590		—		—		—		3,590
Change in fair value of interest rate swaps	—		—		—		—		—		—		(1,842)		(1,842)
Net income	—		—		9,405		9,405		17,645		(70)		—		26,980
BALANCE AT DECEMBER 31, 2020	9,855	$	139,105	$	(29,739)	$	109,366	$	181,621	$	2,346	$	(1,805)	$	291,528
Shares issued pursuant to trustee compensation plan	3		57		—		57		—		—		—		57
Contribution of assets in exchange for the issuance of noncontrolling interest shares	—		—		—		—		2,883		—		—		2,883
Shares/units redeemed	(82)		(1,552)		—		(1,552)		(4,014)		—		—		(5,566)
Dividends and distributions declared	—		—		(10,761)		(10,761)		(19,319)		—		—		(30,080)
Dividends reinvested - stock dividend	363		6,888		—		6,888		—		—		—		6,888
Issuance of shares under optional purchase plan	203		4,064		—		4,064		—		—		—		4,064
Change in fair value of interest rate swaps	—		—		—		—		—		—		855		855
Contributions from consolidated real estate entity noncontrolling interests	—		—		—		—		—		450		—		450
Net income	—		—		8,794		8,794		15,783		(139)		—		24,438
BALANCE AT DECEMBER 31, 2021	10,342	$	148,562	$	(31,706)	$	116,856	$	176,954	$	2,657	$	(950)	$	295,517
Shares issued pursuant to trustee compensation plan	3		65		—		65		—		—		—		65
Contribution of assets in exchange for the issuance of noncontrolling interest shares	—		—		—		—		12,870		—		—		12,870
Shares/units redeemed	(53)		(1,155)		—		(1,155)		(922)		—		—		(2,077)
Dividends and distributions declared	—		—		(12,222)		(12,222)		(21,482)		—		—		(33,704)
Dividends reinvested - stock dividend	341		7,468		—		7,468		—		—		—		7,468
Issuance of shares under optional purchase plan	177		4,063		—		4,063		—		—		—		4,063
Change in fair value of interest rate swaps	—		—		—		—		—		—		14,732		14,732
Net income	—		—		8,921		8,921		15,628		(17)		—		24,532
BALANCE AT DECEMBER 31, 2022	10,810	$	159,003	$	(35,007)	$	123,996	$	183,048	$	2,640	$	13,782	$	323,466

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 and 2020


	Year Ended
	December 31,
	2022		2021		2020

	(in thousands)
OPERATING ACTIVITIES
Net income	$	24,532	$	24,438	$	26,980
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale or conversion of real estate investments		(11,090)		(1,710)		(3,383)
Loss on impairment of property		561		—
Gain on involuntary conversion		(1,047)		(1,225)		(360)
Change in fair value of securities		(322)		—
Equity in loss (gain) of unconsolidated affiliates		2,339		261		(263)
Distributions of earnings of unconsolidated affiliates		261		233		361
Allowance for uncollectible accounts receivable		(281)		(667)		540
Depreciation		22,161		20,918		19,770
Amortization		2,518		1,285		1,418
Amortization of debt issuance costs		675		608		634
Effects on operating cash flows due to changes in
Other assets		(209)		807		(177)
Tenant security deposits payable		1,143		349		328
Accrued expenses and other liabilities		(471)		(242)		(1,159)
NET CASH PROVIDED BY OPERATING ACTIVITIES		40,770		45,055		44,689
INVESTING ACTIVITIES
Gross purchase of securities		(29,130)		-		-
Proceeds from maturity of securities		81		-		-
Purchase of real estate investment properties		(81,974)		(35,915)		(13,377)
Capital expenditures and tenant improvements		(9,623)		(18,007)		(31,136)
Proceeds from sale of real estate investments and non-real estate investments		25,463		5,610		12,502
Proceeds from involuntary conversion		1,579		4,095		1,288
Investment in unconsolidated affiliates		(13,869)		(9,493)		(2,264)
Distributions in excess of earnings received from unconsolidated affiliates		504		—		422
Notes receivable issued net of payments received		(991)		(5,431)		(726)
NET CASH USED IN INVESTING ACTIVITIES		(107,960)		(59,141)		(33,291)
FINANCING ACTIVITIES
Payments for financing, debt issuance		(408)		(1,283)		(484)
Payments on investment certificates and subordinated debt		—		(25)		(100)
Principal payments on special assessments payable		—		—		(498)
Proceeds from issuance of mortgage notes payable and subordinated debt		37,569		116,180		71,175
Principal payments on mortgage notes payable		(22,231)		(43,641)		(48,553)
Advances on lines of credit		1,008		818,689		30,964
Payments on lines of credit		—		(818,689)		(30,964)
Proceeds from notes payable		26,500		—		—
Proceeds from issuance of shares under optional purchase plan		4,063		4,064		3,590
Shares/units redeemed		(2,077)		(5,566)		(3,537)
Dividends/distributions paid		(25,310)		(22,622)		(22,738)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		19,114		47,107		(1,145)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS		(48,076)		33,021		10,253
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD		60,656		27,635		17,382
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD	$	12,580	$	60,656	$	27,635

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD
Cash and cash equivalents	$	3,257	$	51,507	$	11,716
Restricted deposits		9,323		9,149		15,919
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD	$	12,580	$	60,656	$	27,635

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 and 2020 (Continued)


	Year Ended
	December 31,
	2022		2021		2020

	(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	19,305	$	17,332	$	16,491

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	7,468	$	6,888	$	6,511
Dividends declared and not paid		3,108		2,740		2,608
UPREIT distributions declared and not paid		5,385		4,827		4,838
Shares issued pursuant to trustee compensation plan		65		57		64
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		12,870		2,883		10,293
Increase in land improvements due to increase in special assessments payable		219		235		231
Unrealized gain (loss) on interest rate swaps		14,732		855		(1,842)
Acquisition of assets through assumption of debt and liabilities		406		569		6,193
Capitalized interest and real estate taxes related to construction in progress		91		250		644

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

Note 1 – Organization

Sterling Real Estate Trust, d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code.

Sterling previously established an operating partnership (“Sterling Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of December 31, 2022 and 2021, Sterling owned approximately 36.60% and 36.22%, respectively, of the operating partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Sterling and all subsidiaries for which we maintain a controlling interest.

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).

Principles of Consolidation

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

As of December 31, 2022, the Trust owned approximately 36.60% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the LLLP Agreement and the redemptions plans, these persons have the right to request the Operating Partnership redeem their OP Units following a specified restricted period. All redemptions are at the sole discretion of the Trust, acting for itself or in its capacity as General Partner of the Operating Partnership, and further subject to the conditions and limitations of the LLLP Agreement and redemption plans, as the same may be amended or modified from time to time. If the Trust accepts a redemption request, the redemption of OP Units shall be made in cash in an amount equal to the fair value of an equivalent number of common shares of the Trust. In lieu of delivering cash, however, the Trust, as the Operating Partnership’s general partner, may, at its option and in its sole and absolute discretion, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Trust so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Trust’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Trust issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Trust an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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

The operating partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s sole significant asset is its investment in the operating partnership. The Trust is the primary beneficiary of the Operating Partnership and accordingly consolidated the Operating Partnership. As a result, substantially all of the Trust’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Trust’s debt is an obligation of the Operating Partnership, and the Trust guarantees the unsecured debt obligations of the Operating Partnership. The Trust may acquire property using a reverse like-kind exchange structure (a “Reverse 1031 Like-Kind Exchange”) under the Code to defer taxable gains on the subsequent sale of real estate property. As such, the acquired property (the “Parked Property”) remains in the possession of a VIE whose legal equity interests are owned by a qualified intermediary engaged to execute the Reverse 1031 Like-Kind Exchange until the subsequent sale transaction and the Reverse 1031 Like-Kind Exchange are completed. Although the VIE is legally owned by the qualified intermediary, the Trust retains essentially all of the legal and economic benefits and obligations related to the VIE (which holds the legal title to the Parked Property prior to the completion of the Reverse 1031 Like-Kind Exchange) and, as its designated manager, has the key decision-making power over the Parked Property. The VIE (including the Parked Property) is included in the Trust’s consolidated financial statements as a consolidated VIE until legal title is transferred to the Trust upon completion of the Reverse 1031 Like-Kind Exchange.

Concentration of Credit Risk

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

Use of Estimates

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

Real Estate Investments

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

The Trust allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the relative acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, and (v) assumed financing that is determined to be above or below market, if any. Transaction costs related to acquisitions accounted for as asset acquisitions are capitalized as incurred and included as a cost of the building in the accompanying balance sheet.

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 as incurred.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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

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

a substantial decline or negative cash flows;

continued low occupancy rates;

continued difficulty in leasing space;

significant financially troubled tenants;

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

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

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

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

projected capital expenditures;

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

comparable selling prices; and

property specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of real estate investments.

Based on evaluation, there were was one impairment loss of $561 during the year ended December 31, 2022. There were no impairment losses during the years ended December 2021 and 2020.

Cash and Cash Equivalents and Restricted Deposits

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents. Restricted deposits include funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrows and escrow deposits required by lenders on certain properties to be used for future building renovations or tenant improvements. As of December 31, 2022 and December 31, 2021, the Trust did not hold any U.S. Treasury Bills ‘Securities’ in cash and cash equivalents. As of December 31, 2022, all U.S. Treasury Bills are classified as Level 1 investments in the fair value hierarchy.

Investments in U.S. Treasury Bills

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

Treasury Bills are short-term debt obligations with maturities of one year or less issued by the U.S. Treasury Department and backed by the U.S. Government. Treasury Bills yield no interest, but are issued at a discount to the redemption price. We classify our investments in U.S. Treasury Bills as investments in securities. We use quoted market prices to determine the fair value of our investments in U.S. Treasury Bills.

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 (losses), 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 years ended December 31, 2022, 2021 and 2020.

Other Assets

Other assets are comprised of the following as of December 31, 2022 and 2021:


	December 31, 2022		December 31, 2021

	(in thousands)
Due from related party	$	50	$	336
Accounts receivable, net		5,821		5,342
Insurance claim receivable		3,846		145
Fair value of interest rate swap		13,782		698
Other assets		181		192
Financing fees, less accumulated amortization		86		18
Lease costs, less accumulated amortization		1,799		2,065
Prepaid expenses		1,747		1,506
Total other assets, net	$	27,312	$	10,302

Note receivable,

Notes receivable are issued periodically and are secured and interest bearing. The Trust has one note receivable for a commercial tenant bearing a 6.5% per annum interest rate which matures in 2025.

Accrued Expenses and Other liabilities

Accrued Expenses and other liabilities are comprised of the following as of December 31, 2022 and 2021:


	December 31, 2022		December 31, 2021

	(in thousands)
Special assessments payable	$	647	$	690
Due to related party		1,408		473
Accounts payable - trade		2,340		3,272
Retainage payable		3		86

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

Fair value of interest rate swap		—		1,648
Deferred insurance proceeds		2		476
Accrued interest expense		1,318		1,323
Accrued real estate taxes		7,275		6,653
Accrued unearned rent		2,936		3,055
Other liabilities		146		928
Total accrued expenses and other liabilities	$	16,075	$	18,604

Debt Issuance Costs

We amortize external debt issuance costs related to notes and mortgage notes using the effective interest rate method, over the life term of the related debt. We record debt issuance costs 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 as financing fees in other assets, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.

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 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 other 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 Trust reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Trust that are not wholly owned by the Trust. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interest in partially owned properties in the consolidated statements of operations and other comprehensive income.

Federal Income Taxes

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

A summary of the tax characterization of the dividends paid to shareholders of the Company’s common stock for the years ended December 31, 2022, 2021 and 2020 follows:


	Tax Year Ended December 31,
	Dividend		%		Dividend		%		Dividend		%
	2022		2022		2021		2021		2020		2020
Tax status
Ordinary income	$	0.6374	55.43	%	$	0.9833	92.76	%	$	0.8994	84.95	%
Capital gain		—	—	%		0.0767	7.24	%		—	—	%
Return of capital		0.5126	44.57	%		—	—	%		0.1593	15.05	%
	$	1.1500	100.00	%	$	1.0600	100.00	%	$	1.0587	100.00	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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 our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the consolidated 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 December 31, 2022 and 2021 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 2019.

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.

Revenue Recognition

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted with the purpose that average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $302 and $550 for the years ended December 31, 2022 and 2021, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of December 31, 2022 and 2021, was $3,756 and $3,569, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimated. The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of December 31, 2022, all leases analyzed under the Trust’s lease classification process were determined to be operating leases.

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 December 31, 2022, 2021 and 2020 and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods. As the calculation does not include net income attributable to the Operating Partnership, Operating Partnership Units are not included in the calculation, and does not have any impact on earnings per share.

For the years ended December 31, 2022, 2021 and 2020, Sterling’s denominators for the basic and diluted earnings per common share were approximately 10,632,000, 10,160,000, and 9,694,000, respectively.

Reclassifications

Certain reclassifications considered necessary for a fair presentation have been made to the prior period financial statements in order to conform to the current year’s presentation. These reclassifications have not changed the results of operations or equity.

Recent Accounting Pronouncements

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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, and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). 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.

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 years ended December 31, 2022, 2021 and 2020, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements for the years ended December 31, 2022 and 2021.


	Year ended December 31, 2022						Year ended December 31, 2021						Year ended December 31, 2020
	Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)						(in thousands)
Income from rental operations	$	113,968	$	21,092	$	135,060	$	107,284	$	22,040	$	129,324	$	98,576	$	26,040	$	124,616
Expenses from rental operations		64,647		6,491		71,138		57,454		7,315		64,769		52,686		6,883		59,569
Net operating income	$	49,321	$	14,601	$	63,922	$	49,830	$	14,725	$	64,555	$	45,890	$	19,157	$	65,047
Depreciation and amortization						24,679						22,203						21,214
Interest						19,994						18,142						17,097
Administration of REIT						5,247						4,381						4,217
Other income						(10,530)						(4,609)						(4,461)
Net income					$	24,532					$	24,438					$	26,980

Segment Assets and Accumulated Depreciation


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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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


As of December 31, 2021	Residential		Commercial		Total

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

NOTE 4 - RESTRICTED DEPOSITS AND FUNDED RESERVES


	As of December 31,		As of December 31,
	2022		2021

	(in thousands)
Tenant security deposits	$	6,242	$	5,165
Real estate tax and insurance escrows		1,336		1,355
Replacement reserves		1,745		1,791
Other funded reserves		—		838
	$	9,323	$	9,149

NOTE 5 – Investment in unconsolidated affiliates


			Total Investment in Unconsolidated Affiliates at
Unconsolidated Affiliates	Date Acquired	Trust Ownership Interest	December 31, 2022		December 31, 2021
Banner Building	2007	66.67%	$	(614)	$	60
Grand Forks INREIT, LLC	2003	50%		4,961		2,493
SE Savage, LLC	2019	60%		1,660		2,946
SE Maple Grove, LLC	2019	60%		1,836		2,823
SE Rogers, LLC	2020	60%		2,413		2,986
ST Oak Cliff, LLC	2021	70%		9,098		4,324
SE Brooklyn Park, LLC	2021	60%		2,914		3,026
SE Fossil Creek, LLC	2022	70%		7,155		-
			$	29,423	$	18,658

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 December 31, 2022 and 2021 of $6,951 and $6,329, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The operating partnership is a 50% owner of a 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 December 31, 2022 and 2021 of $9,520 and $9,794, respectively. The Trust is jointly and severally liable for the full mortgage balance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

The Operating Partnership owns a 60% interest in a limited liability company that holds a multifamily property. The property is encumbered by a first mortgage with a balance of $30,726 at December 31, 2022. The Trust is jointly and severally liable for the full mortgage balance. At December 31, 2021, the property was encumbered by a first mortgage of $26,210, and a second mortgage to Sterling Properties, LLLP of $6,129. Additionally, at December 31, 2022, SE Savage, LLC has an outstanding Promissory Note with Sterling Properties, LLLP, for $1,397, and is an unsecured obligation of SE Savage, LLC. The note is considered to be additional at-risk funds to the Operating Partnership, in SE Savage, LLC, and is included in Notes Receivable on the Consolidated Balance Sheet at December 31, 2022.

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

The Operating Partnership owns a 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 $32,864 and $22,847 at December 31, 2022 and December 31, 2021, respectively. The entity encumbered by a first mortgage has a balance of $25,742 and $15,688 at December 31, 2022 and December 31, 2021, respectively. The Company is jointly and severally liable for the full mortgage balance. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at December 31, 2022 of $2,938.

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 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 $40,404 and $7,394 at December 31, 2022 and December 31, 2021, respectively. The entity is encumbered by a construction mortgage with a balance of $23,409 at December 31, 2022. There was no balance outstanding related to the construction mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company, with an unrelated third party. The entity is currently developing a multifamily property. The entity is located in Brooklyn Park, Minnesota, with total assets of $30,490 and $5,478 at December 31, 2022 and December 31, 2021, respectively. The entity is encumbered by a first mortgage that has a balance of $24,448 at December 31, 2022. There was no balance outstanding related to the first mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.

During the second quarter of 2022, the Operating Partnership entered into a joint venture arrangement. Through the joint venture, the Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of December 31, 2022, the Operating Partnership has contributed $7,190 in cash to the entity. The entity holds land located in Fort Worth, Texas with total assets of $11,083 at December 31, 2022.

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


	December 31, 2022		December 31, 2021

	(in thousands)
ASSETS
Real estate investments	$	218,747	$	134,839
Accumulated depreciation		(16,490)		(10,940)
		202,257		123,899
Cash and cash equivalents		3,093		1,131
Restricted deposits		1,034		650
Intangible assets, less accumulated amortization		542		41
Other assets, net		827		909
Total Assets	$	207,753	$	126,630

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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


LIABILITIES
Mortgage notes payable, net	$	152,246	$	87,996
Tenant security deposits payable		192		108
Accrued expenses and other liabilities		8,217		8,029
Total Liabilities	$	160,655	$	96,133
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	47,098	$	30,497

Total liabilities and shareholders' equity	$	207,753	$	126,630

The following is a summary of results of operations of the unconsolidated affiliates for the years ended the years ended December 31, 2022, 2021 and 2020.


	The year ended December 31,
	2022		2021		2020
	(in thousands)
Income from rental operations	$	9,545	$	4,746	$	3,001
Expenses from rental operations		3,668		1,632		928
Net operating income	$	5,877	$	3,114	$	2,073
Depreciation and Amortization		5,678		1,248		688
Interest		4,148		2,275		970
Other Income		(91)		-		(24)
Net (loss) income	$	(3,858)	$	(409)	$	439

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 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)


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

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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


	Intangible		Intangible
Years ending December 31,	Assets		Liabilities

	(in thousands)
2023	$	1,597	$	151
2024		757		151
2025		757		151
2026		606		80
2027		498		42
Thereafter		1,075		71
	$	5,290	$	646

The weighted average amortization period for the intangible assets (in-place leases, above-market leases) and intangible liabilities (below-market leases) acquired as of December 31, 2022 was 2.9 years.

The portion of the purchase price allocated to acquire 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 $145, $154, and $186 for the years ended December 31, 2022, 2021 and 2020, respectively, was recorded as a reduction to income from rental operations. Amortization pertaining to below market lease intangibles of $164, $183, and $213 for the years ended December 31, 2022, 2021 and 2020, respectively, was recorded as an increase to income from rental operations.

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 December 31, 2022, the Bremer line of credit secures one letter of credit totaling $50, leaving $8,857 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. As of December 31, 2022 and December 31, 2021, there was a balance of $1,008 and $-, respectively.

Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage, debt to net worth ratios, and debt yield ratios. As of December 31, 2022 and 2021, no properties were out of compliance.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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 December 31, 2021, the Trust did not have any outstanding balances on notes payable.

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


	Principal Balance At
	December 31,		December 31,
	2022		2021

	(in thousands)
Fixed rate mortgage notes payable (a)	$	508,305	$	490,413
Variable rate mortgage notes payable		-		5,237
Mortgage notes payable		508,305		495,650
Less unamortized debt issuance costs		2,138		2,508
	$	506,167	$	493,142

(a)	Includes $106,033 and $108,734 of variable rate mortgage debt that was swapped to a fixed rate as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, we had 115 fixed rate mortgage loan with effective interest rates ranging from 2.43% to 6.85% per annum, and a weighted average effective interest rate of 3.79% per annum.

As of December 31, 2021, we had 114 fixed rate and one variable rate mortgage loan with effective interest rates ranging from 2.09% to 6.85% per annum, and a weighted average effective interest rate of 3.83% per annum on fixed rate loans and 2.10% per annum on variable rate loans.

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 with the lender. Additionally, 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, 2022, eight loans were out of compliance due to increased repair and maintenance costs related to unit renovations and increased utility costs. The loans were secured by various properties with a total outstanding balance of $17,687. Annual waivers were received from the lenders on all loans out of compliance as of December 31, 2022. As of December 31, 2021, five loans were out of compliance due increased repair and maintenance costs related to unit renovations, bad debt allowance, and increased vacancies in the North Dakota and Minnesota markets. The loans were secured by various properties with a total outstanding balance of $9,915. Annual waivers were received from the lenders on all loans out of compliance as of December 31, 2021.

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)
2023	$	53,341
2024		22,376
2025		53,130
2026		45,546
2027		77,845
Thereafter		256,067
Total payments	$	508,305

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

(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 interest rate derivatives to manage our exposure to interest rate 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 December 31, 2022, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with variable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in “Accumulated other comprehensive (loss) income” and are reclassified into interest expense as interest payments are made on the Company’s variable rate debt. During the next 12 months, the Trust estimates that an additional $2,311 will be reclassified as a decrease to interest expense.

The following table summarizes the Trust’s interest rate swaps designated as cash flow hedges as of December 31, 2022:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
November 1, 2019	$	6,575	3.15%	November 1, 2029
November 1, 2019	$	4,572	3.28%	November 1, 2029
January 10, 2020	$	2,979	3.39%	January 10, 2030
July 1, 2020	$	4,743	2.79%	June 10, 2030
December 2, 2020	$	12,362	2.91%	December 2, 2027
July 1, 2021	$	25,678	2.99%	July 1, 2031
November 10, 2021	$	28,047	3.54%	August 1, 2029
December 1, 2021	$	10,813	3.32%	December 1, 2031
August 15, 2022	$	1,491	3.07%	June 15, 2030
August 15, 2022	$	2,888	3.07%	June 15, 2030
August 15, 2022	$	1,614	2.94%	June 15, 2030
August 15, 2022	$	4,271	2.94%	June 15, 2030

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


	Number of Instruments			Notional
Interest Rate Derivatives	December 31, 2022	December 31, 2021		December 31, 2022		December 31, 2021
Interest rate swaps	12	12	$	106,033	$	108,734

The table below presents the estimated fair value of the Company’s derivative financial instruments as well as their classification in the accompanying consolidated balance sheets. The valuation techniques are described in Note 10 to the consolidated financial statements.


Derivatives designated as	December 31, 2022			December 31, 2021
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	13,782	Other assets, net	$	698
Interest rate swaps	Accrued expenses and other liabilities	$	—	Accrued expenses and other liabilities	$	1,648

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive income (loss) for the years ended December 31, 2022 and 2021:



			Location of Gain
		Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		AOCI into Income
		2022			2022
Interest rate swaps	$	(14,732)	Interest expense	$	94
		2021			2021
Interest rate swaps	$	(855)	Interest expense	$	670

Credit-risk-related Contingent Features

The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Trust could also be declared in default on its corresponding derivative obligation. As of December 31, 2022, the termination value of derivatives in a liability position was $0 and the termination value of derivatives in an asset position was $13,782. As December 31, 2022, 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:


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

	(in thousands)
Financial assets:
Investment in securities	$	29,371	$	29,371	$	—	$	—
Notes receivable	$	8,448	$	9,789	$	7,457	$	9,840
Derivative assets	$	13,782	$	13,782	$	698	$	698

Financial liabilities:
Mortgage notes payable	$	508,305	$	466,245	$	495,650	$	508,285
Derivative liabilities	$	—	$	—	$	1,648	$	1,648

The carrying values shown in the table are included in the consolidated balance sheets under the captions indicated in Note 10. 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

DECEMBER 31, 2022, 2021 AND 2020

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

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

●

Level 1 – Quoted prices for identical instruments in active markets.

●

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable.

●

Level 3 – Instruments whose significant inputs are unobservable.

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

Recurring Fair Value Measurements

The following table presents the Trust’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)
December 31, 2022
Derivative assets	$	—	$	13,782	$	—	$	13,782

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

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.

The Company has determined that the majority of the inputs used to value its derivatives fall 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.

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)
December 31, 2022
U.S. Treasury Bills	$	29,371	$	—	$	—	$	29,371
Mortgage notes payable	$	—	$	—	$	466,245	$	466,245
Notes receivable	$	—	$	—	$	9,789	$	9,789
December 31, 2021
Mortgage notes payable	$	—	$	—	$	508,285	$	508,285
Notes receivable	$	—	$	—	$	9,840	$	9,840

U.S. Treasury Bills: The Trust estimates the fair value of its Treasury Bills by using quoted market prices.

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DECEMBER 31, 2022, 2021 AND 2020

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

Mortgage notes payable: The 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 Trust for similar debt instruments of comparable maturities by the Trust’s lenders. The rates used range from 5.75% to 6.00% and from 3.25% to 3.35% December 31, 2022 and 2021, respectively.

Notes receivable: The Trust estimates the fair value of its notes receivable by discounting future cash flows of each instrument at rates currently offered to the Trust for similar note instruments of comparable maturities by the Trust’s lenders. The fair value rate ranged from 3.25% to 7.25% December 31, 2021 and 2022, respectively.

NOTE 11 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of December 31, 2022 and 2021, outstanding limited partnership units totaled 18,730,000 and 18,212,000, respectively. Total aggregate distributions per unit for the years ended December 31, 2022, 2021 and 2020 were $1.1500, $1.0600 and $1.0587, respectively. The operating partnership declared fourth quarter distributions of $5,385 and $4,827, to limited partners payable in January 2023 and 2022, respectively.

During the year ended December 31, 2022, there were no limited partnership units of the operating partnership exchanged for common shares of the trust.

Provided the Trust’s redemption plan exists, and subject to the conditions and limitations contained in such redemption plan (including, without limitation, applicable holding periods and ownership limitations), and further subject to the conditions and limitations set forth in the LLLP Agreement of the Operating Partnership, a Limited Partner may request the redemption of its limited partnership units for cash (a “Redemption Request”) or the exchange of its limited partnership units for Sterling common shares (an “Exchange Request”). Such request must be made in accordance with the redemption plan. Upon receipt of any Redemption or Exchange Request, as the case may be, the Trust may, at its sole and absolute discretion, acting for itself or as General Partner of the Operating Partnership, elect to redeem or exchange such limited partnership units. The Trust may, in its sole discretion, terminate, amend or suspend the redemption plan if such action is determined to be in the best interest of the Operating Partnership.

NOTE 12 – REDEMPTION PLANS

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

Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $55,000 worth of securities. As of December 31, 2022, there were $14,684 worth of securities left to be redeemed under the redemption plan. Currently, the fixed redemption price is $21.85 per share or unit under the plans which price became effective January 1, 2022. Prior to January 1, 2022, the redemption price was $19.00 per share or unit under the plan. Prior to January 1, 2021, the redemption price was $18.25 per share or unit under the plan.

We may redeem securities under the plans provided the aggregate total has not been exceeded if 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 years ended December 31, 2022, 2021 and 2020, the Company redeemed 53,000, 82,000 and 127,000 common shares valued at $1,155, $1,552 and $2,321, respectively. In addition, during the years ended December 31, 2022, 2021 and 2020, the Company redeemed 42,000, 211,000 and 66,000 units valued at $922, $4,014 and $1,216, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

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 beneficial interest of Sterling. As of December 31, 2022 and 2021, there were 10,810,000 and 10,342,000 common shares outstanding. We had no preferred shares outstanding as of either date.

Dividends paid to holders of common shares were $1.1500 per share, $1.0600 per share and $1.0587 per share for the years ended December 31, 2022, 2021 and 2020, respectively.

NOTE 14 – DIVIDEND REINVESTMENT PLAN

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges. On July 20, 2012, we registered with the Securities Exchange Commission 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012. On July 11, 2017, we registered with the Securities Exchange Commission an additional 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 11, 2017. On November 3, 2020, 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 November 3, 2020.

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. In addition, eligible shareholders may not in any calendar year purchase or receive via transfer more than $40 additional optional cash purchases of Common Shares.

The estimated value per common share was $23.00 and $20.00 at December 31, 2022 and 2021, respectively.

Therefore, the purchase price per common share for dividend reinvestments was $21.85 and $19.00 and for additional optional cash purchases was $23.00 and $20.00 at December 31, 2022 and 2021, 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 year ended December 31, 2022, 342,000 shares were issued pursuant to dividend reinvestments and 177,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2021, 363,000 shares were issued pursuant to dividend reinvestments and 203,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2020, 356,000 shares were issued pursuant to dividend reinvestments and 187,000 shares were issued pursuant to additional optional cash purchases under the plan.

NOTE 15 – 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, 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, and by President Joel S.

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DECEMBER 31, 2022, 2021 AND 2020

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

Thomsen. In addition, Mr. Regan serves as the Executive Chairman of the Advisor, and Messrs. Wieland, and Thomsen serve on the Board of Governors of both the Advisor and GOLDMARK Property Management, Inc.

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

GOLDMARK Property Management, Inc., is a North Dakota corporation formed in 1981. GOLDMARK Property Management, Inc. performs property management services for the Trust.

We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. Mr. Wieland, a Trustee, also serves as a Board Member of Bell Bank. Mr. Wieland could have an indirect material interest in any such engagement and related transactions.

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

Property Management Fee

During the years ended December 31, 2022, 2021 and 2020, we paid property management and administrative fees to GOLDMARK Property Management, Inc. of $13,833, $12,836, and $12,796, respectively. Management fees which approximate 5% of net collected rents, account for $5,499, $5,271, and $4,851 of these fees during the years ended December 31, 2022, 2021 and 2020. In addition, during the years ended December 31, 2022, 2021, and 2020, we paid repair and maintenance expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling $7,744, $6,536, and $6,549, respectively

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The Advisor may receive fees related to management of the Trust, acquiring, disposing, or developing real estate property, project management fees, and financing fees related to lending relationships, under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 24, 2022, and is effective until March 31, 2023.

The below table summarizes the fees incurred to our Advisor.


	Year Ended December 31,
	2022		2021		2020

	(in thousands)
Fee:
Advisory	$	3,683	$	3,348	$	3,116
Acquisition	$	1,321	$	375	$	708
Disposition	$	703	$	146	$	319
Financing	$	83	$	224	$	133
Project Management	$	450	$	572	$	365

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DECEMBER 31, 2022, 2021 AND 2020

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

The below table summarizes the fees payable to our Advisor.


	Payable at
	December 31,		December 31,
	2022		2021

	(in thousands)
Fee:
Advisory	$	632	$	296
Acquisition	$	387	$	-
Development	$	-	$	79
Disposition	$	72	$	-
Financing	$	-	$	38
Project Management	$	12	$	98

Operating Partnership Units Issued in Connection with Acquisitions

During the year ended December 31, 2022, 510,000 Operating Partnership units were issued to an 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 $11,741.

During the year ended December 31, 2021, there were no Operating Partnership units issued directly or indirectly, to affiliated entities.

During the year ended December 31, 2020, 208,000 Operating Partnership units were issued to an 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 $4,671.

Commissions

During the years ended December 31, 2022, 2021 and 2020, we incurred real estate commissions of $567, $312, and $633, respectively, to GOLDMARK Commercial Real Estate, Inc., in which Messrs. Regan and Wieland jointly own a controlling interest. As of December 31, 2022, there were commissions of $183 payable to GOLDMARK Commercial Real Estate. As of December 2021 and 2020, there were no unpaid commissions to GOLDMARK Commercial Real Estate.

During the years ended December 31, 2022, 2021 and 2020, we incurred real estate commissions of $418, $217, and $308, respectively to GOLDMARK Property Management. As of December 31, 2022, there were commissions of $92 payable to GOLDMARK Property Management. As of December 31, 2021 and 2020 there were no unpaid commissions to GOLDMARK Property Management.

Rental Income

During the years ended December 31, 2022, 2021 and 2020, we received rental income of $130, $106, and $85, respectively, under an operating lease agreement with our Advisor.

During the years ended December 31, 2022, 2021 and 2020, we received no rental income, $19, and $57, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate, Inc.

During the years ended December 31, 2022, 2021 and 2020, we received rental income of $267, $294, and $268, respectively, under operating lease agreements with GOLDMARK Property Management, Inc.

During the years ended December 31, 2022, 2021 and 2020, we received rental income of $859, $404, and $484, respectively, under operating lease agreements with Bell Bank.

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DECEMBER 31, 2022, 2021 AND 2020

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

Other operational costs

During the years ended December 31, 2022, 2021 and 2020, the Trust incurred $207, $276, and $240, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. At December 31, 2022 and 2021, there were no operational outstanding liabilities and $128, respectively.

During the years ended December 31, 2022 and 2020, the Trust received did not receive related parties reimbursement for expenses paid that were associated with capital projects. During the year ended December 31, 2021, the Trust received $1,000 from related parties for reimbursement for expenses paid that were associated with capital projects. No reimbursements for operational receivables were received during the year ended December 31, 2022. At December 31, 2022, operational receivables outstanding due from related parties was $50 and $336, respectively.

Debt Financing

At December 31, 2022 and 2021, the Trust had $64,123 and $66,365, respectively, of outstanding principal on loans entered into with Bell Bank. During the years ended December 31, 2022, 2021 and 2020, the Trust incurred interest expense on debt held with Bell Bank of $2,480, $2,508, and $2,438, respectively. Accrued interest at December 31, 2022 and 2021, related to this debt was $130 and $148, respectively.

A December 31, 2022 and 2021, the Trust had $26,500 and $-, respectively, of outstanding principal on notes payable entered into with Bell Bank. During the years ended December 31, 2022, 2021 and 2020, the Trust did not incur interest expense on note payable held with Bell Bank.

Mezzanine Financing

The Trust offers mezzanine financing to joint ventures, see note 5 for investment in unconsolidated affiliates.

As of December 31, 2022 and 2021, Sterling issued $5,854 and $6,855, respectively, in second mortgage financing to related entities.

During the years ended December 31, 2022 and 2021, the Trust earned interest income of $350 and $212, respectively, related to the second mortgage financing. No interest income was earned during the year ended December 31, 2020.

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. At December 31, 2022, 2021, and 2020 total premiums incurred for this policy were $48, $166 and $118, respectively.

Tenant Improvement Arrangements

During the year ended December 31, 2021, the Trust paid $2,782 in tenant improvement costs associated with a lease agreement with Trustmark Enterprises, Inc. There were no tenant improvement costs incurred during the years ended December 31, 2022 and 2020. At December 31, 2022, no costs were owed to related parties for tenant improvement costs.

Development Arrangements

Effective August 25, 2021, The Trust purchased a 70% interest in ST Oak Cliff Dallas, LLC. The purpose of the entity is to develop and construct a 318-unit multifamily property located in Dallas, Texas. The partnering investee, TG Oak Cliff Dallas, LLC is owned in part by Kenneth P. Regan, the Trust’s Chief Executive Officer and Trustee. Mr. Regan is also a partner in Trumont Group, the developer

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DECEMBER 31, 2022, 2021 AND 2020

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

engaged by ST Oak Cliff Dallas, LLC to oversee the development of the property. Further, Mr. Regan is also a partner in Trumont Construction, the company who was engaged to oversee the day-to-day construction operations of the property.

During the years ended December 31, 2022 and 2021, the Trust incurred and paid $411 and $256, respectively, in development fees to Trumont Group. No such fees were paid during the year ended December 31, 2020. At December 31, 2022 the Trust owed $- and $51, respectively, in development fees to Trumont Group.

During the years ended December 31, 2022 and 2021, the Trust incurred and paid $799 and $71, respectively, in construction fees to Trumont Construction. No such fees were paid during the year ended December 31, 2020. At December 31, 2022 the Trust owed $71 and $29, respectively, in construction fees to Trumont Construction.

During the years ended December 31, 2022 and 2021, the Trust incurred and paid $639 and $41, respectively, in general construction costs to Trumont Construction. No such fees were paid during the year ended December 31, 2020. At December 31, 2022 there was $81 of general construction costs were owed to Trumont Construction. At December 31, 2021, no general construction costs were owed to Trumont Construction.

NOTE 16 - RENTALS UNDER OPERATING LEASES / RENTAL INCOME

Residential apartment units are rented to individual tenants with lease terms of one year or less.

Commercial properties are leased to tenants under terms expiring at various dates through 2038. Lease terms often include renewal options.

As of December 31, 2022, we derived 84.4% of our revenues from residential leases that are generally for terms of one-year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of December 31, 2022, we derived 15.6% of our revenues from commercial leases primarily under long-term lease agreements. Substantially all commercial leases contain fixed escalations, or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize variable income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common 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.

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 $302 for the year ended December 31, 2022, and increased revenue by $550 for the year ended December 31, 2021. The straight-line receivable balance included in other assets on the consolidated balance sheets as of the years ended December 31, 2022 and 2021 was $3,756 and $3,569 respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates.

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DECEMBER 31, 2022, 2021 AND 2020

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

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


	Year ended December 31, 2022
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	109,769	$	16,091	$	125,860
Lease income related to variable lease payments		—		4,510		4,510
Other (a)		(804)		332		(472)
Lease Income (b)	$	108,965	$	20,933	$	129,898

(a)

For the year ended December 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.

(b)

Excludes other rental income for the year ended December 31, 2022, of $5,162, which is accounted for under the revenue recognition standard.


	Year ended December 31, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	103,039	$	16,490	$	119,529
Lease income related to variable lease payments		—		4,576		4,576
Other (c)		(538)		630		92
Lease Income (d)	$	102,501	$	21,696	$	124,197

(c)

For the year ended December 31, 2021, “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 year ended December 31, 2021, of $5,127, which is accounted for under the revenue recognition standard.

Commercial space is rented under long-term agreements. Minimum future rentals on non-cancelable operating leases as of December 31, 2022 are as follows:


Years ending December 31,	Amount
	(in thousands)
2023	$	15,216
2024		14,940
2025		14,556
2026		13,156
2027		11,719
Thereafter		42,734
	$	112,321

NOTE 17 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we own or may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property.

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DECEMBER 31, 2022, 2021 AND 2020

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

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

Risk of Uninsured Property Losses

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

Litigation

The Company 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 outcome of such matters will not have a material effect on the consolidated financial statements of the Trust.

NOTE 18 – DISPOSITIONS

During the year ended December 31, 2022, the Operating Partnership sold five properties. We sold a retail property located in Savage, Minnesota for a sale price of $2,700 and recognized a gain of $1,328 in March 2022. We sold a residential property located in Moorhead, Minnesota for a sale price of $6,400 and recognized a gain of $2,012 in May 2022. We sold an office property located in Edina, Minnesota for a sale price of $15,320 and recognized a gain of $6,728 in August 2022. We sold a residential property located in East Grand Forks, MN for a sale price of $1,200 and recognized a loss of $171 in September 2022. We sold a retail property located in Bloomington, Minnesota for a sale price of $2,888 and recognized a gain of $1,193 in December 2022.

During the year ended December 31, 2021, the Operating Partnership sold two properties. We sold a retail property located in Waite Park, Minnesota, for a sale price of $900 and recognized a gain of $2 in April 2021. We sold a residential property located in Moorhead, Minnesota, for a sale price of $4,950 and recognized a gain of $1,708 in June 2021.

During the year ended December 31, 2020, the Operating Partnership sold three properties. We sold a retail property located in Apple Valley, Minnesota, for a sale price of $3,670 and recognized a gain of $1,456 in March 2020. We sold an office property located in St. Cloud, Minnesota, for a sale price of $2,050 and recognized a gain of $1 in May 2020. We sold an office property located in Bismarck, North Dakota for a sale price of $7,000 and recognized a gain of $1,926 in December 2020.

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DECEMBER 31, 2022, 2021 AND 2020

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

NOTE 19 –ACQUISITIONS

The Company acquired the following properties during the year ended December 31, 2022.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Total Acquisition Cost

2/28/22

Deer Park

Hutchinson, MN

Apartment Complex

138 units

15,073

5/31/22

Desoto Estates

Grand Forks, ND

Apartment Complex

68 units

5,863

5/31/22

Desoto Townhomes

Grand Forks, ND

Townhomes

24 units

3,226

5/31/22

Desoto Apartments

East Grand Forks, MN

Apartment Complex

24 units

1,230

6/10/22

Diamond Bend

Mandan, ND

Apartment Complex

78 units

10,919

9/13/22

Newgate Apartments

Bismarck, ND

Apartment Complex

46 units

2,444

12/1/22

Chandler 1898

Grand Forks, ND

Apartment Complex

12 units

498

12/29/22

Prose Fossil Creek

Fort Worth, TX

Apartment Complex

270 units

55,591

94,844

The acquisition of Prose Fossil Creek was made utilizing a Reverse 1031 Like-Kind Exchange that was entered into at closing. As such, as of December 29, 2022, Prose Fossil Creek is in the possession of a qualified intermediary engaged to execute the Reverse 1031 Like-Kind Exchange until the sale transaction and the Reverse 1031 Like-Kind Exchange are completed. The Trust retains essentially all of the legal and economic benefits and obligations related to Prose Fossil Creek prior to the completion of the Reverse 1031 Like-Kind Exchange. Accordingly, Prose Fossil Creek is included in the Trust’s consolidated financial statements as a consolidated VIE until legal title is transferred to the Trust upon completion of the Reverse 1031 Like-Kind Exchange.

Total consideration given for acquisitions the year ended December 31, 2022 was completed through issuing approximately 560,000 limited partnership units of the operating partnership valued at $23.00 per unit for an aggregate consideration of approximately $12,870. 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 Company acquired the following properties during the year ended December 31, 2021.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Purchase Price

6/1/21

Flagstone

Fargo, ND

Apartment Complex

120 units

7,723

6/1/21

Brownstone

Fargo, ND

Apartment Complex

72 units

4,362

6/1/21

Briar Pointe

Fargo, ND

Apartment Complex

30 units

1,929

7/1/21

Oxford

Fargo, ND

Apartment Complex

144 units

10,066

7/1/21

Pinehurst

Fargo, ND

Apartment Complex

210 units

14,718

38,798

Total consideration given for acquisitions the year ended December 31, 2021 was completed through issuing approximately 144,000 limited partnership units of the operating partnership valued at $20.00 per unit for an aggregate consideration of approximately $2,883. 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 Company acquired the following properties during the year ended December 31, 2020.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

1/12/20

Wolf Creek

Fargo, ND

Apartment complex

54 units

5,227

1/31/20

Columbia Park Village

Grand Forks, ND

Apartment complex

12 units

642

3/1/20

Belmont East & West

Bismarck, ND

Apartment complex

5,348 sq. ft.

1,568

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022, 2021 AND 2020

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

3/1/20

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,358

3/1/20

Hawn

Fargo, ND

Apartment complex

48 units

2,524

3/1/20

Rosser

Bismarck, ND

Apartment complex

24 units

1,359

8/28/20

Trustmark (a)

Fargo, ND

Office building

units

6,588

9/15/20

Foxtail Townhomes

Fargo, ND

Apartment complex

30 units

1,434

12/17/20

Evergreen Terrace

Omaha, NE

Apartment complex

144 units

2,970

23,670

Total consideration given for acquisitions during the year ended December 31, 2020, was completed through issuing approximately 535,000 limited partnership units of the operating partnership valued at $19.25 per unit for an aggregate consideration of approximately $10,293. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees and reflects the fair value at the time of issuance.

In 2022, cash flows were reclassified to updated presentation resulting prior period to be updated to align with reclassification. The following table summarizes the allocation of the purchase price, before prorations, the Company recorded in conjunction with the acquisitions discussed above:


	Year Ended
	December 31,
	2022		2021		2020
Real estate investment acquired	$	93,515	$	39,344	$	29,775
Acquired lease intangible assets		1,732		-		46
Assumed Assets		3		23		38
Total Assets Acquired	$	95,250	$	39,367	$	29,859
Other liabilities		(406)		(569)		(6,189)
Net assets acquired		94,844		38,798		23,670
Equity/limited partnership unit consideration		(12,870)		(2,883)		(10,293)
Net cash consideration	$	81,974	$	35,915	$	13,377

NOTE 20 - SUBSEQUENT EVENTS

On January 1, 2023, Damon K. Gleave and Michael P. Carlson owned shares in Trustmark Enterprises, Inc.

On January 13, 2023, the Trust obtained financing on a residential property for $27,500.

On January 13, 2023, the Trust paid off a note for $26,500 with Bell Bank that was set to mature on February 1, 2023.

On February 24, 2023, Barry L. Schmeiss resigned as Chief Investment Officer of the Trust.

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

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Industrial				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Guardian Building Products	Fargo, ND	$	2,487	$	820	$	2,554	$	60	$	(94)	$	880	$	2,460	$	3,340	$	641	08/29/2012		40
Titan Machinery	Bismarck, ND		2,069		950		1,395		32		—		982		1,395		2,377		279	01/28/2015		40
Titan Machinery	Dickinson, ND		1,816		354		1,096		400		—		754		1,096		1,850		297	07/30/2012		40
Titan Machinery	Fargo, ND		2,471		781		1,947		515		—		1,296		1,947		3,243		499	10/30/2012		40
Titan Machinery	Marshall, MN		4,674		300		3,648		81		—		381		3,648		4,029		1,026	11/01/2011		40
Titan Machinery	Minot, ND		—		618		1,654		—		—		618		1,654		2,272		431	08/01/2012		40
Titan Machinery	North Platte, NE		—		325		1,269		—		—		325		1,269		1,594		223	01/29/2016		40
Titan Machinery	Sioux City, IA		3,699		315		2,472		—		—		315		2,472		2,787		572	10/25/2013		40
Total		$	17,216	$	4,463	$	16,035	$	1,088	$	(94)	$	5,551	$	15,941	$	21,492	$	3,968


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Land				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Taco Bell	Denver, CO	$	389	$	669	$	—	$	—	$	—	$	669	$	—	$	669	$	—	06/14/2011
West 80	Rochester, MN		—		1,364		—		—		—		1,364		—		1,364		—	08/29/2016
Total		$	389	$	2,033	$	—	$	—	$	—	$	2,033	$	—	$	2,033	$	—

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Medical				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Bio-Life	Bismarck, ND	$	2,091	$	306	$	2,255	$	11	$	123	$	317	$	2,378	$	2,695	$	968	01/03/2008	9	-	40
Bio-Life	Grand Forks, ND		2,150		457		2,230		1		158		458		2,388		2,846		994	01/03/2008	10	-	40
Bio-Life	Janesville, WI		1,786		250		1,857		—		123		250		1,980		2,230		819	01/03/2008	9	-	40
Bio-Life	Mankato, MN		2,271		390		2,111		280		1,154		670		3,265		3,935		1,273	01/03/2008	11	-	40
Bio-Life	Marquette, MI		—		213		2,793		—		123		213		2,916		3,129		1,170	01/03/2008	9	-	40
Bio-Life	Onalaska, WI		1,723		208		1,853		—		323		208		2,176		2,384		880	01/03/2008	11	-	40
Bio-Life	Oshkosh, WI		1,773		293		1,705		—		146		293		1,851		2,144		785	01/03/2008	10	-	40
Bio-Life	Sheboygan, WI		2,022		623		1,611		—		248		623		1,859		2,482		768	01/03/2008	10	-	40
Bio-Life	Stevens Point, WI		1,935		119		2,184		—		123		119		2,307		2,426		941	01/03/2008	9	-	40
Total		$	15,751	$	2,859	$	18,599	$	292	$	2,521	$	3,151	$	21,120	$	24,271	$	8,598


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Residential				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Amberwood	Grand Forks, ND	$	2,376	$	426	$	3,304	$	3	$	178	$	429	$	3,482	$	3,911	$	552	09/13/2016	20	-	40
Arbor I/400	Bismarck, ND		350		73		516		4		65		77		581		658		142	06/04/2013		40
Arbor II/404	Bismarck, ND		358		73		538		6		43		79		581		660		128	11/01/2013		40
Arbor III/406	Bismarck, ND		356		71		536		7		43		78		579		657		128	11/01/2013		40
Ashbury	Fargo, ND		2,287		314		3,774		26		25		340		3,799		4,139		578	12/19/2016		40
Auburn II	Fargo, ND		825		105		883		12		87		117		970		1,087		372	03/23/2007	20	-	40
Autumn Ridge	Grand Forks, ND		5,162		1,072		8,875		44		67		1,116		8,942		10,058		3,687	08/16/2004	9	-	40
Barrett Arms	Crookston, MN		723		37		1,001		—		177		37		1,178		1,215		241	01/02/2014		40
Bayview	Fargo, ND		2,350		284		3,447		59		2,020		343		5,467		5,810		1,455	12/31/2007	20	-	40
Belmont East and West	Bismarck, ND		742		167		1,424		2		8		169		1,432		1,601		102	03/1/2020		40
Berkshire	Fargo, ND		401		31		406		7		53		38		459		497		155	03/31/2008	20	-	40
Betty Ann	Fargo, ND		421		74		738		6		140		80		878		958		267	08/31/2009		40
Birchwood 1	Fargo, ND		228		72		342		4		42		76		384		460		46	12/01/2017		40
Birchwood 2	Fargo, ND		1,342		234		2,099		52		288		286		2,387		2,673		290	12/01/2017		40
Bradbury Apartments	Bismarck, ND		1,791		1,049		4,922		—		81		1,049		5,003		6,052		532	10/24/2018		40
Briar Pointe	Fargo, ND		1,283		384		1,551		—		—		384		1,551		1,935		61	06/01/2021		40
Bridgeport	Fargo, ND		4,839		613		7,676		14		61		627		7,737		8,364		1,174	12/19/2016		40
Bristol Park	Grand Forks, ND		2,801		985		3,976		—		779		985		4,755		5,740		804	02/01/2016		40
Brookfield	Fargo, ND		1,945		228		1,958		30		318		258		2,276		2,534		761	08/01/2008	20	-	40

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Brownstone	Fargo, ND	2,891	780	3,610	—	—	780	3,610	4,390	143	06/01/2021		40
Cambridge (FKA 44th Street)	Fargo, ND	1,614	333	1,845	4	237	337	2,082	2,419	480	02/06/2013		40
Candlelight	Fargo, ND	1,583	613	1,221	(326)	589	287	1,810	2,097	412	11/30/2012		40
Carling Manor	Grand Forks, ND	498	69	656	1	61	70	717	787	250	03/31/2008		40
Carlton Place	Fargo, ND	5,885	703	7,070	96	714	799	7,784	8,583	2,576	09/01/2008	20	-	40
Carr	Fargo, ND	583	66	759	4	41	70	800	870	116	01/17/2017		40
Cedars 4	Fargo, ND	—	134	1,068	—	29	134	1,097	1,231	111	12/31/2018		40
Chandler 1802	Grand Forks, ND	613	133	1,114	—	108	133	1,222	1,355	256	01/02/2014		40
Chandler 1834	Grand Forks, ND	399	112	552	—	39	112	591	703	61	09/1/2018		40
Chandler 1866	Grand Forks, ND	318	31	270	—	59	31	329	360	130	01/03/2005	20	-	40
Chandler 1898	Grand Forks, ND	—	114	357	—	—	114	357	471	1	12/1/2022		40
Cherry Creek (FKA Village)	Grand Forks, ND	—	173	1,435	1	274	174	1,709	1,883	534	11/01/2008		40
Cityside Apartments	Fargo, ND	676	192	1,129	6	62	198	1,191	1,389	126	11/30/2018		40
Columbia Park Village I	Grand Forks, ND	295	102	546	—	—	102	546	648	41	01/31/2020		40
Columbia West	Grand Forks, ND	2,379	294	3,367	1	591	295	3,958	4,253	1,298	09/01/2008	20	-	40
Country Club	Fargo, ND	1,006	252	1,252	2	240	254	1,492	1,746	410	05/02/2011	20	-	40
Countryside	Fargo, ND	593	135	677	—	68	135	745	880	203	05/02/2011		40
Courtyard	St. Louis Park, MN	2,865	2,270	5,681	—	794	2,270	6,475	8,745	1,466	09/03/2013	5	-	40
Dakota Manor	Fargo, ND	1,391	249	2,236	20	182	269	2,418	2,687	486	08/07/2014		40
Danbury	Fargo, ND	4,572	381	5,869	211	653	592	6,522	7,114	2,317	12/31/2007	20	-	40
Dellwood Estates	Anoka, MN	6,177	844	9,924	—	861	844	10,785	11,629	2,468	05/31/2013		40
Deer Park	Hutchinson, MN	8,838	1,784	12,545	—	—	1,784	12,545	14,329	287	02/28/2022		40
Desoto Estates	Grand Forks, ND	4,155	955	4,869	—	—	955	4,869	5,824	81	05/31/2022		40
Desoto Townhomes	Grand Forks, ND	1,589	464	2,767	—	—	464	2,767	3,231	46	05/31/2022		40
Diamond Bend	Mandan, ND	6,825	722	9,789	—	—	722	9,789	10,511	143	06/10/2022		40
Eagle Run	West Fargo, ND	3,659	576	5,787	128	180	704	5,967	6,671	1,822	08/12/2010		40
Eagle Sky I	Bismarck, ND	801	115	1,292	—	104	115	1,396	1,511	248	03/01/2016		40
Eagle Sky II	Bismarck, ND	801	135	1,279	—	173	135	1,452	1,587	245	03/01/2016		40
East Bridge	Fargo, ND	3,143	792	5,396	1	301	793	5,697	6,490	770	07/03/2017		40
Eastbrook	Bismarck, ND	639	145	1,233	—	—	145	1,233	1,378	87	01/31/2020		40
Echo Manor	Hutchinson, MN	911	141	875	—	118	141	993	1,134	215	01/02/2014	20	-	40
Emerald Court	Fargo, ND	—	66	830	11	180	77	1,010	1,087	340	03/31/2008	20	-	40
Essex	Fargo, ND	525	212	642	—	68	212	710	922	98	06/01/2017		40
Evergreen Terrace	Omaha, NE	5,060	820	7,573	—	84	820	7,657	8,477	399	12/17/2020		40
Fairview	Bismarck, ND	2,502	267	3,978	39	918	306	4,896	5,202	1,527	12/31/2008	20	-	40
Flagstone	Fargo, ND	5,110	1,535	6,258	—	—	1,535	6,258	7,793	248	06/01/2021		40
Flickertail	Fargo, ND	4,799	426	5,590	76	1,674	502	7,264	7,766	2,132	12/31/2008		40
Forest Avenue	Fargo, ND	324	61	637	8	64	69	701	770	166	02/06/2013		40
Foxtail Creek Townhomes	Fargo, ND	—	267	1,221	—	—	267	1,221	1,488	71	09/15/2020		40
Galleria III	Fargo, ND	667	118	681	2	292	120	973	1,093	237	11/09/2010		40
Garden Grove	Bismarck, ND	4,089	606	6,073	—	168	606	6,241	6,847	1,050	05/04/2016	5	-	40
Georgetown on the River	Fridley, MN	16,522	4,620	23,833	8	4,117	4,628	27,950	32,578	5,451	12/19/2014	5	-	40
Glen Pond	Eagan, MN	35,566	3,761	20,569	38	960	3,799	21,529	25,328	5,842	12/02/2011	20	-	40
Glen Pond Addition	Eagan, MN	6,056	876	15,408	—	—	876	15,408	16,284	899	09/30/2020		40

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Granger Court I	Fargo, ND	1,908	279	1,926	25	301	304	2,227	2,531	479	06/04/2013	20	-	40
Hannifin	Bismarck, ND	403	81	607	5	52	86	659	745	147	11/01/2013		40
Harrison and Richfield	Grand Forks, ND	4,904	756	6,346	7	321	763	6,667	7,430	2,578	07/01/2007	5	-	40
Hartford Apartments	Fargo, ND	833	154	1,233	—	14	154	1,247	1,401	132	10/1/2018		40
Hawn	Fargo, ND	1,491	280	2,277	—	—	280	2,277	2,557	161	03/01/2020		40
Highland Meadows	Bismarck, ND	5,440	1,532	8,513	—	457	1,532	8,970	10,502	1,271	05/01/2017	5	-	40
Hunters Run I	Fargo, ND	473	50	419	5	(2)	55	417	472	163	03/23/2007		40
Hunters Run II	Fargo, ND	430	44	441	2	—	46	441	487	160	07/01/2008		40
Huntington	Fargo, ND	314	86	309	4	15	90	324	414	60	08/04/2015		40
Islander	Fargo, ND	732	98	884	49	115	147	999	1,146	270	07/01/2011		40
Jadestone	Fargo, ND	498	212	554	—	127	212	681	893	90	06/01/2017		40
Kennedy	Fargo, ND	354	84	588	7	91	91	679	770	161	02/06/2013	20	-	40
Library Lane	Grand Forks, ND	2,006	301	2,332	16	189	317	2,521	2,838	937	10/01/2007	20	-	40
Madison	Grand Forks, ND	272	95	497	—	100	95	597	692	102	09/01/2015		40
Maple Ridge	Omaha, NE	7,749	766	5,608	59	3,715	825	9,323	10,148	2,582	08/01/2008	20	-	40
Maplewood	Maplewood, MN	8,556	3,120	11,655	—	2,411	3,120	14,066	17,186	2,537	12/19/2014	5	-	40
Maplewood Bend I, II, III. IV, V, VI, VII, VIII & Royale	Fargo, ND	4,235	783	5,839	1	491	784	6,330	7,114	1,899	01/01/2009	20	-	40
Martha Alice	Fargo, ND	421	74	738	6	183	80	921	1,001	279	08/31/2009	20	-	40
Mayfair	Grand Forks, ND	—	80	1,043	4	123	84	1,166	1,250	394	07/01/2008	20	-	40
Monticello	Fargo, ND	544	60	752	14	111	74	863	937	184	11/08/2013	20	-	40
Montreal Courts	Little Canada, MN	16,802	5,809	19,565	15	3,605	5,824	23,170	28,994	4,961	10/02/2013	5	-	40
Morningside Apartments	Fargo, ND	458	85	673	—	42	85	715	800	71	11/30/2018		40
Newgate	Bismarck, ND	1,503	538	1,755	—	—	538	1,755	2,293	15	09/13/2022		40
Oak Court	Fargo, ND	2,502	270	2,210	29	436	299	2,646	2,945	899	04/30/2008	28	-	40
Oakview Townhomes	Grand Forks, ND	3,473	822	4,698	1	471	823	5,169	5,992	767	01/11/2017		40
Oxford	Fargo, ND	6,679	1,655	8,563	—	—	1,655	8,563	10,218	321	07/01/2021		40
Pacific Park I	Fargo, ND	526	95	777	3	130	98	907	1,005	205	02/06/2013		40
Pacific Park II	Fargo, ND	450	111	865	4	140	115	1,005	1,120	225	02/06/2013		40
Pacific South	Fargo, ND	278	58	459	2	16	60	475	535	114	02/06/2013		40
Park Circle	Fargo, ND	547	196	716	7	17	203	733	936	102	06/01/2017		40
Parkview Arms	Bismarck, ND	—	373	3,845	—	365	373	4,210	4,583	784	05/13/2015	5	-	40
Parkwest Gardens	West Fargo, ND	3,010	713	5,712	39	1,390	752	7,102	7,854	1,396	06/30/2014	20	-	40
Parkwood	Fargo, ND	—	126	1,143	14	23	140	1,166	1,306	407	08/01/2008		40
Pebble Creek	Bismarck, ND	3,588	260	2,818	31	(62)	291	2,756	3,047	958	03/19/2008	20	-	40
Pinehurst	Fargo, ND	9,716	2,368	12,614	—	—	2,368	12,614	14,982	473	07/01/2021		40
Plumtree	Fargo, ND	516	100	782	—	29	100	811	911	114	05/01/2017		40
Prairiewood Courts	Fargo, ND	—	308	1,730	28	143	336	1,873	2,209	725	09/01/2006	20	-	40
Prairiewood Meadows	Fargo, ND	3,781	736	852	11	367	747	1,219	1,966	232	09/30/2012		40
Prose Fossil Creek	Fort Worth, TX	—	5,451	46,811	—	—	5,451	46,811	52,262	98	12/29/2022		40
Quail Creek	Springfield, MO	5,317	1,529	7,396	—	1,656	1,529	9,052	10,581	1,537	02/03/2015	5	-	40
Robinwood	Coon Rapids, MN	4,129	1,380	6,133	—	711	1,380	6,844	8,224	1,333	12/19/2014		40
Rosedale Estates	Roseville, MN	13,916	4,680	20,591	—	836	4,680	21,427	26,107	4,289	12/19/2014	5	-	40
Rosegate	Fargo, ND	2,888	251	2,978	49	132	300	3,110	3,410	1,136	04/30/2008	20	-	40
Rosser	Bismarck, ND	688	156	1,216	—	86	156	1,302	1,458	88	03/01/2020		40

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Roughrider	Grand Forks, ND		373		100		448		—		117		100		565		665		93	08/01/2016	5	-	40
Saddlebrook	West Fargo, ND		1,306		148		1,262		203		105		351		1,367		1,718		462	12/31/2008		40
Sage Park	New Brighton, MN		9,307		2,520		13,985		—		1,061		2,520		15,046		17,566		3,031	12/19/2014	5	-	40
Sargent	Fargo, ND		940		164		1,529		4		17		168		1,546		1,714		233	01/10/2017		40
Schrock	Fargo, ND		425		71		626		3		66		74		692		766		152	06/04/2013		40
Sheridan Pointe	Fargo, ND		1,976		292		2,387		21		39		313		2,426		2,739		547	10/01/2013		40
Sierra Ridge	Bismarck, ND		6,575		754		8,795		151		863		905		9,658		10,563		2,987	09/01/2006		40
Somerset	Fargo, ND		—		300		3,400		43		57		343		3,457		3,800		1,235	07/01/2008		40
Southgate	Fargo, ND		4,744		803		5,267		20		64		823		5,331		6,154		2,015	07/01/2007	20	-	40
Southview III	Grand Forks, ND		—		99		522		1		116		100		638		738		170	08/01/2011		40
Southview Villages	Fargo, ND		2,376		268		2,483		16		645		284		3,128		3,412		1,012	10/01/2007	20	-	40
Spring	Fargo, ND		429		76		822		75		24		151		846		997		210	02/06/2013	20	-	40
Stanford Court	Grand Forks, ND		—		291		3,866		—		454		291		4,320		4,611		997	02/06/2013	20	-	40
Stonefield-Phase I	Bismarck, ND		7,500		2,804		11,060		227		802		3,031		11,862		14,893		2,273	08/01/2014	20	-	40
Stonefield-Phase II	Bismarck, ND		4,766		1,201		3,678		486		5,754		1,687		9,432		11,119		1,345	10/23/2014		40
Stonefield-Phase III	Bismarck, ND		—		1,079		—		238		—		1,317		—		1,317		—	10/23/2014
Stonybrook	Omaha, NE		6,124		1,439		8,003		—		1,574		1,439		9,577		11,016		3,088	01/20/2009	20	-	40
Summerfield	Fargo, ND		469		129		599		6		82		135		681		816		120	08/04/2015		40
Summit Point	Fargo, ND		3,284		681		5,434		22		449		703		5,883		6,586		1,020	10/01/2015	20	-	40
Sunchase	Fargo, ND		1,011		181		1,563		14		86		195		1,649		1,844		234	05/01/2017		40
Sunset Ridge	Bismarck, ND		10,813		1,759		9,560		36		145		1,795		9,705		11,500		3,234	06/06/2008	9	-	40
Sunview	Grand Forks, ND		—		144		1,578		2		241		146		1,819		1,965		587	12/31/2008	20	-	40
Sunwood	Fargo, ND		2,491		358		3,252		38		541		396		3,793		4,189		1,304	07/01/2007	20	-	40
Thunder Creek	Fargo, ND		2,645		633		4,063		1		551		634		4,614		5,248		525	03/1/2018	25	-	40
Twin Oaks	Hutchinson, MN		5,203		816		3,245		—		149		816		3,394		4,210		692	10/01/2014		40
Twin Parks	Fargo, ND		—		119		2,072		43		227		162		2,299		2,461		757	10/01/2008	20	-	40
Valley Homes Duplexes	Grand Forks, ND		998		356		1,668		1		418		357		2,086		2,443		390	01/22/2015		40
Valley View	Golden Valley, MN		4,107		1,190		6,076		—		458		1,190		6,534		7,724		1,274	12/19/2014	5	-	40
Village Park	Fargo, ND		609		219		1,932		51		80		270		2,012		2,282		725	04/30/2008		40
Village West	Fargo, ND		2,154		357		2,274		61		126		418		2,400		2,818		836	04/30/2008		40
Washington	Grand Forks, ND		350		74		592		—		75		74		667		741		108	05/04/2016		40
Westcourt	Fargo, ND		2,294		287		2,914		28		195		315		3,109		3,424		702	01/02/2014	5	-	40
West Oak	Fargo, ND		608		85		692		47		36		132		728		860		116	01/17/2017		40
Westside	Hawley, MN		456		59		360		—		99		59		459		518		127	02/01/2010		40
Westwind	Fargo, ND		561		49		455		1		95		50		550		600		206	04/30/2008	20	-	40
Westwood	Fargo, ND		3,108		597		6,341		91		764		688		7,105		7,793		2,378	06/05/2008	20	-	40
Willow Park	Fargo, ND		3,228		288		5,286		39		799		327		6,085		6,412		1,943	12/31/2008		40
Wolf Creek	Fargo, ND		2,979		1,082		4,210		—		28		1,082		4,238		5,320		319	01/12/2020		40
Woodland Pines	Omaha, NE		6,047		842		10,596		—		1,372		842		11,968		12,810		1,199	11/30/2018		40
Total		$	400,085	$	93,455	$	588,087	$	3,013	$	57,599	$	96,468	$	645,686	$	742,154	$	122,246

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Office				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
32nd Avenue	Fargo, ND	$	4,763	$	635	$	3,298	$	87	$	1,226	$	722	$	4,524	$	5,246	$	1,651	03/16/2004	3	-	40
Bell Plaza	Bloomington, MN		30,662		6,912		34,672		—		4,635		6,912		39,307		46,219		11,707	08/13/2015	3	-	40
Trustmark	Fargo, ND		6,915		2,089		4,718		14		6,298		2,103		11,016		13,119		712	08/28/2020		40
First International Bank & Trust	Moorhead, MN		—		210		712		5		88		215		800		1,015		295	05/13/2011	10	-	40
Four Points	Fargo, ND		—		70		1,238		—		175		70		1,413		1,483		520	10/18/2007	5	-	40
Gate City	Grand Forks, ND		—		382		893		1		810		383		1,703		2,086		405	03/31/2008		40
Goldmark Office Park	Fargo, ND		12,362		1,160		11,788		65		8,832		1,225		20,620		21,845		5,289	07/01/2007	1	-	40
Great American Bldg	Fargo, ND		1,064		511		1,290		22		447		533		1,737		2,270		760	02/01/2005	28	-	40
Midtown Plaza	Minot, ND		1,103		30		1,213		—		97		30		1,310		1,340		565	01/01/2004	5	-	40
Parkway office building (FKA Echelon)	Fargo, ND		1,619		278		1,491		42		82		320		1,573		1,893		611	05/15/2007	9	-	40
Redpath	White Bear Lake, MN		2,849		1,195		1,787		—		—		1,195		1,787		2,982		309	02/01/2016		40
Wells Fargo Center	Duluth, MN		—		600		7,195		(115)		2,740		485		9,935		10,420		3,537	07/11/2007	4	-	40
Total		$	61,337	$	14,072	$	70,295	$	121	$	25,430	$	14,193	$	95,725	$	109,918	$	26,361

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Retail				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Applebees	Coon Rapids, MN		—		750		875		8		—		758		875		1,633		281	03/09/2010		40
Dairy Queen	Apple Valley, MN		1,898		845		828		—		—		845		828		1,673		90	09/17/2018		40
Dairy Queen	Dickinson, ND		—		329		658		1		—		330		658		988		181	01/19/2012		40
Dairy Queen	Moorhead, MN		—		243		787		2		—		245		787		1,032		230	05/13/2011		20
Family Dollar	Mandan, ND		—		166		649		—		54		166		703		869		198	12/14/2010		40
OReilly	Mandan, ND		—		115		449		—		27		115		476		591		138	12/14/2010		40
Walgreens	Alexandria, LA		548		1,090		2,973		—		—		1,090		2,973		4,063		969	12/18/2009	28	-	40
Walgreens	Batesville, AR		4,623		472		6,405		—		—		472		6,405		6,877		2,162	07/09/2009		40
Walgreens	Denver, CO		2,984		2,349		2,358		—		—		2,349		2,358		4,707		683	06/14/2011		40
Walgreens	Fayetteville, AR		3,474		636		4,732		—		—		636		4,732		5,368		1,597	07/09/2009		40
Walgreens	Laurel, MS		—		1,280		2,984		—		—		1,280		2,984		4,264		933	07/30/2010		40
Total		$	13,527	$	8,275	$	23,698	$	11	$	81	$	8,286	$	23,779	$	32,065	$	7,462
Grand Totals		$	508,305	$	125,157	$	716,714	$	4,525	$	85,537	$	129,682	$	802,251	$	931,933	$	168,635

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2022

(Dollar amounts in thousands)

Notes:

(a)

The costs capitalized subsequent to acquisition is net of dispositions.

(b)

The changes in total real estate investments for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):


	2022		2021		2020
Balance at January 1,	$	896,702	$	845,288	$	802,028
Purchase of real estate investments		103,252		63,299		57,799
Sale and disposal of real estate investment		(26,960)		(8,184)		(15,467)
Property held for sale		—		1,578		(1,578)
Provision for asset impairment		(561)		—		—
Construction in progress not yet placed in service		(1,285)		(5,279)		2,506
Balance at December 31,	$	971,148	$	896,702	$	845,288

(c)

The changes in accumulated depreciation for the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):


	2022		2021		2020
Balance at January 1,	$	179,155	$	160,575	$	146,316
Depreciation expense		22,161		20,917		19,770
Property held for sale		—		749		(749)
Sale and disposal of real estate investment		(6,467)		(3,086)		(4,762)
Balance at December 31,	$	194,849	$	179,155	$	160,575

(d)

The aggregate cost of our real estate for federal income tax purposes is $763,298.

Table of Contents

Exhibit Index

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit Description

with

Form

ending

Exhibit

Date

3.1

Articles of Organization of Sterling Real Estate Trust filed December 3, 2002

10-12G

3.1

03/10/11

3.2

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

8-K

5.02

06/24/14

3.3

Amended and Restated Bylaws dated June 2, 2020

8-K

3.1

06/03/20

4.1

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

8-K

4.1

06/29/16

4.2

Amended and Restated Share Redemption Plan effective January 1, 2021

8-K

99.1

09/29/21

4.3

Amended and Restated Unit Repurchase Plan effective January 1, 2021

8-K

99.2

09/29/21

4.4

Description of Registrant’s Securities

10-K

12/31/2019

4.11

03/13/20

10.1

Third Amended and Restated Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated January 1, 2014

8-K

5.04

06/24/14

10.2

Amended and Restated Dividend Reinvestment Plan effective June 25, 2020

8-K

10.3

06/30/20

10.3

Amendment to Certificate of Limited Liability Partnership of Sterling Properties, LLLP dated August 1, 2014

8-K

5.03

06/24/14

10.4

Form of Secured Promissory Note (15-Year Note) dated as of December 19, 2014

8-K

10.3

12/23/14

10.5

Form of Secured Promissory Note (10-Year Note) dated as of December 19, 2014

8-K

10.4

12/23/14

10.6

Form of Mortgage, Security Agreement and Fixture Filing dated as of December 19, 2014

8-K

10.5

12/23/14

10.7

Form of Promissory Note dated as of December 19, 2014

8-K

10.6

12/23/14

10.8

Form of Mortgage dated as of December 19, 2014

8-K

10.7

12/23/14

10.9

Form of Commercial Security Agreement dated as of December 19, 2014

8-K

10.8

12/23/14

10.10

Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan approved June 18, 2015

8-K

10.1

06/23/15

10.11

Form of Promissory Note dated as of August 13, 2015

8-K

10.2

08/18/15

10.12

Form of Mortgage, Security Agreement and Fixture Filing dated as of August 13, 2015

8-K

10.3

08/18/15

10.13

Amendment No. 1 to Amended and Restated Independent Trustee Stock Plan

8-K

99.3

04/04/18

10.14

Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan dated March 25, 2021

8-K

10.1

03/31/21

10.15

Eleventh Amended and Restated Advisory Agreement, dated April 1, 2022

8-K

10.1

03/29/22

10.16

Bell Bank Promissory Note, dated December 29, 2022 between Bell Bank and Sterling Properties, LLLP, together with commercial Guaranty of Sterling Real Estate Trust, dated December 29, 2022

8-K

10.1

01/04/23

16.1

Letter of Baker Tilly US, LLP dated March 31, 2021 to the SEC regarding statements in Item 4.01(a)

8-K

16.1

03/31/21

21.1

Subsidiaries of Registrant

23.1

Consent of Independent Registered Public Accounting Firm - RSM, LLP

23.2

Consent of Independent Registered Public Accounting Firm - Baker Tilly US, LLP

31.1

Section 302 Certification of Chief Executive Officer

31.2

Section 302 Certification of Chief Financial Officer

32.1

Section 906 Certification of Chief Executive Officer and Chief Financial Officer

101

The following materials from Sterling Real Estate Trust’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2022 and 2020; (ii) Consolidated Statements of Operations and Comprehensive Income for years ended December 31, 2022, 2021 and 2020; (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020, and; (v) Notes to Consolidated Financial Statements

104

Cover Page Interactive Data File, formatted in IXBRL and contained in Exhibit 101

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2023


	STERLING REAL ESTATE TRUST

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ Kenneth P. Regan (Kenneth P. Regan)	Chief Executive Officer and Trustee (Principal Executive Officer)	March 15, 2023

/s/ Damon K. Gleave (Damon K. Gleave)	Chief Financial Officer and Treasurer (Principal Financial Officer)	March 15, 2023

/s/ Lance R. Wolf (Lance R. Wolf)	Chairman of the Board of Trustees	March 15, 2023

/s/ Ann L. Christenson (Ann L. Christenson)	Trustee	March 15, 2023

/s/ Timothy L. Haugen (Timothy L. Haugen)	Trustee	March 15, 2023

/s/ Timothy A. Hunt (Timothy A. Hunt)	Trustee	March 15, 2023

/s/ Michelle L. Korsmo (Michelle L. Korsmo)	Trustee	March 15, 2023

/s/ Mark T. Polovitz (Mark T. Polovitz)	Trustee	March 15, 2023

/s/ James S. Wieland (James S. Wieland)	Trustee	March 15, 2023

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Sterling Real Estate Trust 10-K2022 FY Annual report

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