UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 20192020
Or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from ------------to------------
Commission File Number:000-54295
Sterling Real Estate Trust
d/b/a Sterling Multifamily Trust
(Exact name of registrant as specified in its charter)
North Dakota | 90-0115411 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1711 Gold Drive South, Suite 100, Fargo, North Dakota | 58103 |
(Address of principal executive offices) | (Zip Code) |
(701) (701) 353-2720
(Registrant’s telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol | Name of each exchange on which registered: | |||
Common Shares, par value $0.01 per share | | N/A | | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐◻
Indicate by check mark whether the registrant has submitte
dsubmitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | ||
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at November 4, |
Common Shares of Beneficial Interest, | |
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STERLING REAL ESTATE TRUST AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Item 1. Financial StatementsItem
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of September 30, 20192020 (UNAUDITED) and December 31, 20182019
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| September 30, |
| December 31, | ||
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| 2019 |
| 2018 | ||
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| (in thousands) | ||||
ASSETS |
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Real estate investments |
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Land and land improvements |
| $ | 114,240 |
| $ | 114,027 |
Building and improvements |
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| 675,193 |
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| 675,308 |
Construction in progress |
|
| 7,044 |
|
| 1,361 |
Real estate investments |
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| 796,477 |
|
| 790,696 |
Less accumulated depreciation |
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| (141,730) |
|
| (128,112) |
Real estate investments, net |
|
| 654,747 |
|
| 662,584 |
Cash and cash equivalents |
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| 13,685 |
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| 21,212 |
Restricted deposits |
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| 8,415 |
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| 8,853 |
Investment in unconsolidated affiliates |
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| 4,046 |
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| 2,691 |
Note receivable |
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| 1,106 |
|
| — |
Lease intangible assets, less accumulated amortization of $15,124 in 2019 and $13,715 in 2018 |
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| 9,567 |
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| 10,976 |
Other assets, net |
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| 6,452 |
|
| 8,151 |
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Total Assets |
| $ | 698,018 |
| $ | 714,467 |
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LIABILITIES |
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Mortgage notes payable, net |
| $ | 390,092 |
| $ | 406,017 |
Dividends payable |
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| 7,090 |
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| 6,828 |
Tenant security deposits payable |
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| 4,436 |
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| 4,286 |
Lease intangible liabilities, less accumulated amortization of $1,819 in 2019 and $1,621 in 2018 |
|
| 1,269 |
|
| 1,468 |
Accrued expenses and other liabilities |
|
| 14,983 |
|
| 12,117 |
Total Liabilities |
|
| 417,870 |
|
| 430,716 |
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|
COMMITMENTS and CONTINGENCIES - Note 14 |
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SHAREHOLDERS' EQUITY |
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Beneficial interest |
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| 101,314 |
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| 97,883 |
Noncontrolling interest |
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Operating partnership |
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| 176,413 |
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| 183,360 |
Partially owned properties |
|
| 2,437 |
|
| 2,538 |
Accumulated other comprehensive loss |
|
| (16) |
|
| (30) |
Total Shareholders' Equity |
|
| 280,148 |
|
| 283,751 |
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|
| $ | 698,018 |
| $ | 714,467 |
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | | | | | |
Land and land improvements | | $ | 119,242 | | $ | 114,666 |
Building and improvements | | | 710,496 | | | 676,228 |
Construction in progress | | | 12,278 | | | 11,134 |
Real estate investments | | | 842,016 | | | 802,028 |
Less accumulated depreciation | | | (159,154) | | | (146,316) |
Real estate investments, net | | | 682,862 | | | 655,712 |
Cash and cash equivalents | | | 6,499 | | | 9,002 |
Restricted deposits | | | 8,451 | | | 8,380 |
Investment in unconsolidated affiliates | | | 8,846 | | | 7,915 |
Notes receivable | | | 2,043 | | | 1,300 |
Lease intangible assets, less accumulated amortization of $15,145 in 2020 and $15,558 in 2019 | | | 7,671 | | | 9,133 |
Other assets, net | | | 7,049 | | | 8,244 |
| | | | | | |
Total Assets | | $ | 723,421 | | $ | 699,686 |
| | | | | | |
LIABILITIES | | | | | | |
Mortgage notes payable, net | | $ | 404,114 | | $ | 393,164 |
Dividends payable | | | 7,402 | | | 7,118 |
Tenant security deposits payable | | | 4,908 | | | 4,439 |
Lease intangible liabilities, less accumulated amortization of $1,987 in 2020 and $1,881 in 2019 | | | 1,044 | | | 1,207 |
Accrued expenses and other liabilities | | | 20,549 | | | 14,711 |
Total Liabilities | | | 438,017 | | | 420,639 |
| | | | | | |
COMMITMENTS and CONTINGENCIES - Note 14 | | | | | | |
| | | | | | |
SHAREHOLDERS' EQUITY | | | | | | |
Beneficial interest | | | 106,210 | | | 102,373 |
Noncontrolling interest | | | | | | |
Operating partnership | | | 178,881 | | | 174,221 |
Partially owned properties | | | 2,401 | | | 2,416 |
Accumulated other comprehensive loss | | | (2,088) | | | 37 |
Total Shareholders' Equity | | | 285,404 | | | 279,047 |
| | | | | | |
| | $ | 723,421 | | $ | 699,686 |
See Notes to Consolidated Financial Statements
3
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED September 30, 20192020 and 20182019 (UNAUDITED)
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| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
| (in thousands, except per share data) |
| (in thousands, except per share data) | ||||||||
Income from rental operations |
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| ||||||||
Real estate rental income | $ | 30,173 |
| $ | 27,591 |
| $ | 90,275 |
| $ | 82,205 |
Tenant reimbursements |
| — |
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| 1,464 |
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| — |
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| 4,597 |
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| 30,173 |
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| 29,055 |
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| 90,275 |
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| 86,802 |
Expenses |
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Expenses from rental operations |
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Operating expenses, excluding real estate taxes |
| 12,344 |
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| 11,311 |
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| 36,355 |
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| 34,022 |
Real estate taxes |
| 3,036 |
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| 2,889 |
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| 9,084 |
|
| 8,633 |
Depreciation and amortization |
| 5,322 |
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| 5,274 |
|
| 16,213 |
|
| 15,907 |
Interest |
| 4,521 |
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| 4,557 |
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| 13,819 |
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| 13,632 |
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| 25,223 |
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| 24,031 |
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| 75,471 |
|
| 72,194 |
Administration of REIT |
| 969 |
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| 1,460 |
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| 3,051 |
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| 3,703 |
Total expenses |
| 26,192 |
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| 25,491 |
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| 78,522 |
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| 75,897 |
Income from operations |
| 3,981 |
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| 3,564 |
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| 11,753 |
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| 10,905 |
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Other income |
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Equity in income of unconsolidated affiliates |
| 235 |
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| 161 |
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| 629 |
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| 445 |
Other income |
| 70 |
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| 45 |
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| 186 |
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| 206 |
Gain on sale of real estate and non-real estate investments |
| — |
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| 3,214 |
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| — |
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| 4,298 |
(Loss)/gain on involuntary conversion |
| (816) |
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| 100 |
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| (487) |
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| 1,467 |
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| (511) |
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| 3,520 |
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| 328 |
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| 6,416 |
Net income | $ | 3,470 |
| $ | 7,084 |
| $ | 12,081 |
| $ | 17,321 |
Net income attributable to noncontrolling interest: |
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Operating Partnership |
| 2,312 |
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| 4,739 |
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| 8,034 |
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| 11,651 |
Partially owned properties |
| (55) |
|
| (34) |
|
| (101) |
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| (127) |
Net income attributable to Sterling Real Estate Trust | $ | 1,213 |
| $ | 2,379 |
| $ | 4,148 |
| $ | 5,797 |
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Net income per common share, basic and diluted | $ | 0.13 |
| $ | 0.27 |
| $ | 0.45 |
| $ | 0.66 |
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Comprehensive income: |
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Net income | $ | 3,470 |
| $ | 7,084 |
| $ | 12,081 |
| $ | 17,321 |
Other comprehensive gain - change in fair value of interest rate swaps |
| 6 |
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| 8 |
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| 14 |
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| 32 |
Comprehensive income |
| 3,476 |
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| 7,092 |
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| 12,095 |
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| 17,353 |
Comprehensive income attributable to noncontrolling interest |
| 2,261 |
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| 4,710 |
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| 7,942 |
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| 11,546 |
Comprehensive income attributable to Sterling Real Estate Trust | $ | 1,215 |
| $ | 2,382 |
| $ | 4,153 |
| $ | 5,807 |
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| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||||||
| September 30, | | September 30, | ||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| (in thousands, except per share data) | | (in thousands, except per share data) | ||||||||
Income from rental operations | | | | ||||||||
Real estate rental income | $ | 30,866 | | $ | 30,173 | | $ | 91,593 | | $ | 90,275 |
Expenses | | | | | | | | | | | |
Expenses from rental operations | | | | | | | | | | | |
Operating expenses, excluding real estate taxes | | 12,142 | | | 12,344 | | | 35,639 | | | 36,355 |
Real estate taxes | | 3,160 | | | 3,036 | | | 9,463 | | | 9,084 |
Depreciation and amortization | | 5,328 | | | 5,322 | | | 15,826 | | | 16,213 |
Interest | | 4,187 | | | 4,521 | | | 12,761 | | | 13,819 |
| | 24,817 | | | 25,223 | | | 73,689 | | | 75,471 |
Administration of REIT | | 972 | | | 969 | | | 3,218 | | | 3,051 |
Total expenses | | 25,789 | | | 26,192 | | | 76,907 | | | 78,522 |
Income from operations | | 5,077 | | | 3,981 | | | 14,686 | | | 11,753 |
| | | | | | | | | | | |
Other income | | | | | | | | | | | |
Equity in income of unconsolidated affiliates | | 125 | | | 235 | | | 363 | | | 629 |
Other income | | 64 | | | 70 | | | 333 | | | 186 |
Gain on sale of real estate and non-real estate investments | | — | | | — | | | 1,456 | | | — |
Gain/(loss) on involuntary conversion | | — | | | (816) | | | 52 | | | (487) |
| | 189 | | | (511) | | | 2,204 | | | 328 |
Net income | $ | 5,266 | | $ | 3,470 | | $ | 16,890 | | $ | 12,081 |
Net income (loss) attributable to noncontrolling interest: | | | | | | | | | | | |
Operating Partnership | | 3,450 | | | 2,312 | | | 11,046 | | | 8,034 |
Partially owned properties | | (28) | | | (55) | | | (15) | | | (101) |
Net income attributable to Sterling Real Estate Trust | $ | 1,844 | | $ | 1,213 | | $ | 5,859 | | $ | 4,148 |
| | | | | | | | | | | |
Net income per common share, basic and diluted | $ | 0.19 | | $ | 0.13 | | $ | 0.61 | | $ | 0.45 |
| | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | |
Net income | $ | 5,266 | | $ | 3,470 | | $ | 16,890 | | $ | 12,081 |
Other comprehensive (loss) gain - change in fair value of interest rate swaps | | (17) | | | 6 | | | (2,125) | | | 14 |
Comprehensive income | | 5,249 | | | 3,476 | | | 14,765 | | | 12,095 |
Comprehensive income attributable to noncontrolling interest | | 3,411 | | | 2,261 | | | 9,641 | | | 7,942 |
Comprehensive income attributable to Sterling Real Estate Trust | $ | 1,838 | | $ | 1,215 | | $ | 5,124 | | $ | 4,153 |
| | | | | | | | | | | |
Weighted average Common Shares outstanding | | 9,740 | | | 9,322 | | | 9,638 | | | 9,208 |
See Notes to Consolidated Financial Statements
4
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED September 30, 2019 and 2018 2020 (UNAUDITED)
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| Accumulated |
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| Noncontrolling |
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| Distributions |
| Total |
| Interest |
| Accumulated |
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| Common |
| Paid-in |
| in Excess of |
| Beneficial |
| Operating |
| Partially Owned |
| Comprehensive |
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| Shares |
| Capital |
| Earnings |
| Interest |
| Partnership |
| Properties |
| Income (Loss) |
| Total | |||||||
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| (in thousands) | |||||||||||||||||||||
BALANCE AT DECEMBER 31, 2018 |
| 8,967 |
| $ 122,624 |
| $ (24,741) |
| $ 97,883 |
| $ 183,360 |
| $ 2,538 |
| $ (30) |
| $ 283,751 | |||||||
Shares/units redeemed |
| (11) |
| (197) |
| - |
| (197) |
| (629) |
| - |
| - |
| (826) | |||||||
Dividends declared |
| - |
| - |
| (2,374) |
| (2,374) |
| (4,661) |
| - |
| - |
| (7,035) | |||||||
Dividends reinvested - stock dividend |
| 82 |
| 1,479 |
| - |
| 1,479 |
| - |
| - |
| - |
| 1,479 | |||||||
Issuance of shares under optional purchase plan |
| 49 |
| 929 |
| - |
| 929 |
| - |
| - |
| - |
| 929 | |||||||
Change in fair value of interest rate swaps |
| - |
| - |
| - |
| - |
| - |
| - |
| 4 |
| 4 | |||||||
Net income |
| - |
| - |
| 1,288 |
| 1,288 |
| 2,532 |
| (30) |
| - |
| 3,790 | |||||||
Balance at March 31, 2019 |
| 9,087 |
| $ 124,835 |
| $ (25,827) |
| $ 99,008 |
| $ 180,602 |
| $ 2,508 |
| $ (26) |
| $ 282,092 | |||||||
Shares/units redeemed |
| (9) |
| (154) |
| - |
| (154) |
| (272) |
| - |
| - |
| (426) | |||||||
Dividends declared |
| - |
| - |
| (2,407) |
| (2,407) |
| (4,657) |
| - |
| - |
| (7,064) | |||||||
Dividends reinvested - stock dividend |
| 86 |
| 1,554 |
| - |
| 1,554 |
| - |
| - |
| - |
| 1,554 | |||||||
Issuance of shares under optional purchase plan |
| 42 |
| 795 |
| - |
| 795 |
| - |
| - |
| - |
| 795 | |||||||
Change in fair value of interest rate swaps |
| - |
| - |
| - |
| - |
| - |
| - |
| 4 |
| 4 | |||||||
Net income |
| - |
| - |
| 1,647 |
| 1,647 |
| 3,190 |
| (16) |
| - |
| 4,821 | |||||||
Balance at June 30, 2019 |
| 9,206 |
| $ 127,030 |
| $ (26,587) |
| $ 100,443 |
| $ 178,863 |
| $ 2,492 |
| $ (22) |
| $ 281,776 | |||||||
Shares issued under trustee compensation plan |
| 3 |
| 62 |
| - |
| 62 |
| - |
| - |
| - |
| 62 | |||||||
Shares/units redeemed |
| (13) |
| (242) |
| - |
| (242) |
| (79) |
| - |
| - |
| (321) | |||||||
Dividends declared |
| - |
| - |
| (2,435) |
| (2,435) |
| (4,655) |
| - |
| - |
| (7,090) | |||||||
Dividends reinvested - stock dividend |
| 87 |
| 1,558 |
| - |
| 1,558 |
| - |
| - |
| - |
| 1,558 | |||||||
Issuance of shares under optional purchase plan |
| 36 |
| 687 |
| - |
| 687 |
| - |
| - |
| - |
| 687 | |||||||
UPREIT units converted to REIT common shares |
| 1 |
| 28 |
| - |
| 28 |
| (28) |
| - |
| - |
| - | |||||||
Change in fair value of interest rate swaps |
| - |
| - |
| - |
| - |
| - |
| - |
| 6 |
| 6 | |||||||
Net income |
| - |
| - |
| 1,213 |
| 1,213 |
| 2,312 |
| (55) |
| - |
| 3,470 | |||||||
BALANCE AT SEPTEMBER 30, 2019 |
| 9,320 |
| $ 129,123 |
| $ (27,809) |
| $ 101,314 |
| $ 176,413 |
| $ 2,437 |
| $ (16) |
| $ 280,148 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Accumulated | | | | | Noncontrolling | | | | | | | |||||
| | | | | | | Distributions | | Total | | Interest | | Accumulated | | | | |||||||
| | Common | | Paid-in | | in Excess of | | Beneficial | | Operating | | Partially Owned | | Comprehensive | | | |||||||
| | Shares | | Capital | | Earnings | | Interest | | Partnership | | Properties | | Income (Loss) | | Total | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | |||||||||||||||||||||
BALANCE AT DECEMBER 31, 2019 | | 9,436 | | $ 131,261 | | $ (28,888) | | $ 102,373 | | $ 174,221 | | $ 2,416 | | $ 37 | | $ 279,047 | |||||||
Contribution of assets in exchange for the issuance of noncontrolling interest shares | | - | | - | | - | | - | | 9,031 | | - | | - | | 9,031 | |||||||
Shares/units redeemed | | (38) | | (696) | | - | | (696) | | (541) | | - | | - | | (1,237) | |||||||
Dividends declared | | - | | - | | (2,527) | | (2,527) | | (4,831) | | - | | - | | (7,358) | |||||||
Dividends reinvested - stock dividend | | 87 | | 1,584 | | - | | 1,584 | | - | | - | | - | | 1,584 | |||||||
Issuance of shares under optional purchase plan | | 62 | | 1,203 | | - | | 1,203 | | - | | - | | - | | 1,203 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | (1,486) | | (1,486) | |||||||
Net income | | - | | - | | 1,813 | | 1,813 | | 3,419 | | (5) | | - | | 5,227 | |||||||
BALANCE AT MARCH 31, 2020 | | 9,547 | | $ 133,352 | | $ (29,602) | | $ 103,750 | | $ 181,299 | | $ 2,411 | | $ (1,449) | | $ 286,011 | |||||||
Shares/units redeemed | | (57) | | (1,039) | | - | | (1,039) | | (209) | | - | | - | | (1,248) | |||||||
Dividends declared | | - | | - | | (2,544) | | (2,544) | | (4,828) | | - | | - | | (7,372) | |||||||
Dividends reinvested - stock dividend | | 88 | | 1,608 | | - | | 1,608 | | - | | - | | - | | 1,608 | |||||||
Issuance of shares under optional purchase plan | | 32 | | 611 | | - | | 611 | | - | | - | | - | | 611 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | (622) | | (622) | |||||||
Net income | | - | | - | | 2,202 | | 2,202 | | 4,177 | | 18 | | - | | 6,397 | |||||||
BALANCE AT JUNE 30, 2020 | | 9,610 | | $ 134,532 | | $ (29,944) | | $ 104,588 | | $ 180,439 | | $ 2,429 | | $ (2,071) | | $ 285,385 | |||||||
Shares issued under trustee compensation plan | | 3 | | 64 | | - | | 64 | | - | | - | | - | | 64 | |||||||
Shares/units redeemed | | (6) | | (118) | | - | | (118) | | (183) | | - | | - | | (301) | |||||||
Dividends declared | | - | | - | | (2,577) | | (2,577) | | (4,825) | | - | | - | | (7,402) | |||||||
Dividends reinvested - stock dividend | | 90 | | 1,644 | | - | | 1,644 | | - | | - | | - | | 1,644 | |||||||
Issuance of shares under optional purchase plan | | 40 | | 765 | | - | | 765 | | - | | - | | - | | 765 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | (17) | | (17) | |||||||
Net income | | - | | - | | 1,844 | | 1,844 | | 3,450 | | (28) | | - | | 5,266 | |||||||
BALANCE AT SEPTEMBER 30, 2020 | | 9,737 | | $ 136,887 | | $ (30,677) | | $ 106,210 | | $ 178,881 | | $ 2,401 | | $ (2,088) | | $ 285,404 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements
5
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
FOR THE THREE AND NINE MONTHS ENDED SeptemberSEPTEMBER 30, 2019 AND 2018 (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2017 | 8,488 |
| $ 113,995 |
| $ (23,179) |
| $ 90,816 |
| $ 179,844 |
| $ 3,180 |
| $ (65) |
| $ 273,775 | ||||||||
Contribution of assets in exchange for the issuance of noncontrolling interest shares |
| - |
| - |
| - |
| - |
| 1,546 |
| - |
| - |
| 1,546 | |||||||
Shares/units redeemed |
| (35) |
| (614) |
| - |
| (614) |
| (316) |
| - |
| - |
| (930) | |||||||
Dividends declared |
| - |
| - |
| (2,190) |
| (2,190) |
| (4,473) |
| - |
| - |
| (6,663) | |||||||
Dividends reinvested - stock dividend |
| 79 |
| 1,373 |
| - |
| 1,373 |
| - |
| - |
| - |
| 1,373 | |||||||
Issuance of shares under optional purchase plan |
| 76 |
| 1,411 |
| - |
| 1,411 |
| - |
| - |
| - |
| 1,411 | |||||||
Change in fair value of interest rate swaps |
| - |
| - |
| - |
| - |
| - |
| - |
| 14 |
| 14 | |||||||
Net income |
| - |
| - |
| 1,741 |
| 1,741 |
| 3,536 |
| (19) |
| - |
| 5,258 | |||||||
Balance at March 31, 2018 |
| 8,608 |
| $ 116,165 |
| $ (23,628) |
| $ 92,537 |
| $ 180,137 |
| $ 3,161 |
| $ (51) |
| $ 275,784 | |||||||
Shares/units redeemed |
| (14) |
| (244) |
| - |
| (244) |
| (489) |
| - |
| - |
| (733) | |||||||
Dividends declared |
| - |
| - |
| (2,217) |
| (2,217) |
| (4,465) |
| - |
| - |
| (6,682) | |||||||
Dividends reinvested - stock dividend |
| 81 |
| 1,425 |
|
|
| 1,425 |
|
|
| - |
| - |
| 1,425 | |||||||
Issuance of shares under optional purchase plan |
| 40 |
| 747 |
| - |
| 747 |
| - |
| - |
| - |
| 747 | |||||||
Change in fair value of interest rate swaps |
| - |
| - |
| - |
| - |
| - |
| - |
| 10 |
| 10 | |||||||
Net income |
| - |
| - |
| 1,677 |
| 1,677 |
| 3,376 |
| (74) |
| - |
| 4,979 | |||||||
Balance at June 30, 2018 |
| 8,715 |
| $ 118,093 |
| $ (24,168) |
| $ 93,925 |
| $ 178,559 |
| $ 3,087 |
| $ (41) |
| $ 275,530 | |||||||
Contribution of assets in exchange for the issuance of noncontrolling interest shares |
| - |
| - |
| - |
| - |
| 630 |
| - |
| - |
| 630 | |||||||
Shares/units redeemed |
| (14) |
| (241) |
| - |
| (241) |
| (263) |
| - |
| - |
| (504) | |||||||
Shares issued under trustee compensation plan |
| 3 |
| 57 |
| - |
| 57 |
| - |
| - |
| - |
| 57 | |||||||
Dividends declared |
| - |
| - |
| (2,248) |
| (2,248) |
| (4,470) |
| - |
| - |
| (6,718) | |||||||
Dividends reinvested - stock dividend |
| 83 |
| 1,458 |
| - |
| 1,458 |
| - |
| - |
| - |
| 1,458 | |||||||
Issuance of shares under optional purchase plan |
| 50 |
| 922 |
| - |
| 922 |
| - |
| - |
| - |
| 922 | |||||||
Change in fair value of interest rate swaps |
| - |
| - |
| - |
| - |
| - |
| - |
| 8 |
| 8 | |||||||
Distributions paid to consolidated real estate entity noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| (477) |
| - |
| (477) | |||||||
Net income |
| - |
| - |
| 2,379 |
| 2,379 |
| 4,739 |
| (34) |
| - |
| 7,084 | |||||||
BALANCE AT SEPTEMBER 30, 2018 |
| 8,837 |
| $ 120,289 |
| $ (24,037) |
| $ 96,252 |
| $ 179,195 |
| $ 2,576 |
| $ (33) |
| $ 277,990 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2018 | | 8,967 | | $ 122,624 | | $ (24,741) | | $ 97,883 | | $ 183,360 | | $ 2,538 | | $ (30) | | $ 283,751 | |||||||
Shares/units redeemed | | (11) | | (197) | | - | | (197) | | (629) | | - | | - | | (826) | |||||||
Dividends declared | | - | | - | | (2,374) | | (2,374) | | (4,661) | | - | | - | | (7,035) | |||||||
Dividends reinvested - stock dividend | | 82 | | 1,479 | | - | | 1,479 | | - | | - | | - | | 1,479 | |||||||
Issuance of shares under optional purchase plan | | 49 | | 929 | | - | | 929 | | - | | - | | - | | 929 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | 4 | | 4 | |||||||
Net income | | - | | - | | 1,288 | | 1,288 | | 2,532 | | (30) | | - | | 3,790 | |||||||
BALANCE AT MARCH 31, 2019 | | 9,087 | | $ 124,835 | | $ (25,827) | | $ 99,008 | | $ 180,602 | | $ 2,508 | | $ (26) | | $ 282,092 | |||||||
Shares/units redeemed | | (9) | | (154) | | - | | (154) | | (272) | | - | | - | | (426) | |||||||
Dividends declared | | - | | - | | (2,407) | | (2,407) | | (4,657) | | - | | - | | (7,064) | |||||||
Dividends reinvested - stock dividend | | 86 | | 1,554 | | - | | 1,554 | | - | | - | | - | | 1,554 | |||||||
Issuance of shares under optional purchase plan | | 42 | | 795 | | - | | 795 | | - | | - | | - | | 795 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | 4 | | 4 | |||||||
Net income | | - | | - | | 1,647 | | 1,647 | | 3,190 | | (16) | | - | | 4,821 | |||||||
BALANCE AT JUNE 30, 2019 | | 9,206 | | $ 127,030 | | $ (26,587) | | $ 100,443 | | $ 178,863 | | $ 2,492 | | $ (22) | | $ 281,776 | |||||||
Shares issued under trustee compensation plan | | 3 | | 62 | | - | | 62 | | - | | - | | - | | 62 | |||||||
Shares/units redeemed | | (13) | | (242) | | - | | (242) | | (79) | | - | | - | | (321) | |||||||
Dividends declared | | - | | - | | (2,435) | | (2,435) | | (4,655) | | - | | - | | (7,090) | |||||||
Dividends reinvested - stock dividend | | 87 | | 1,558 | | - | | 1,558 | | - | | - | | - | | 1,558 | |||||||
Issuance of shares under optional purchase plan | | 36 | | 687 | | - | | 687 | | - | | - | | - | | 687 | |||||||
UPREIT units converted to REIT common shares | | 1 | | 28 | | - | | 28 | | (28) | | - | | - | | - | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | 6 | | 6 | |||||||
Net income | | - | | - | | 1,213 | | 1,213 | | 2,312 | | (55) | | - | | 3,470 | |||||||
BALANCE AT SEPTEMBER 30, 2019 | | 9,320 | | $ 129,123 | | $ (27,809) | | $ 101,314 | | $ 176,413 | | $ 2,437 | | $ (16) | | $ 280,148 | |||||||
See Notes to Consolidated Financial Statements
6
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 20192020 and 20182019 (UNAUDITED)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2019 |
| 2018 | ||
|
| (in thousands) | ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
| $ | 12,081 |
| $ | 17,321 |
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
Gain on sale of real estate investments |
|
| — |
|
| (4,298) |
Loss/(Gain) on involuntary conversion |
|
| 487 |
|
| (1,467) |
Equity in income of unconsolidated affiliates |
|
| (629) |
|
| (445) |
Distributions of earnings of unconsolidated affiliates |
|
| 629 |
|
| 445 |
Allowance for uncollectible accounts receivable |
|
| 125 |
|
| (567) |
Depreciation |
|
| 14,785 |
|
| 14,267 |
Amortization |
|
| 1,390 |
|
| 1,590 |
Amortization of debt issuance costs |
|
| 465 |
|
| 523 |
Effects on operating cash flows due to changes in |
|
|
|
|
|
|
Other assets |
|
| 1,908 |
|
| (1,102) |
Tenant security deposits payable |
|
| 150 |
|
| (1) |
Accrued expenses and other liabilities |
|
| 2,624 |
|
| 2,085 |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 34,015 |
|
| 28,351 |
INVESTING ACTIVITIES |
|
|
|
|
|
|
Purchase of real estate investment properties |
|
| — |
|
| (6,079) |
Capital expenditures and tenant improvements |
|
| (8,935) |
|
| (8,639) |
Proceeds from sale of real estate investments and non-real estate investments |
|
| — |
|
| 13,052 |
Proceeds from involuntary conversion |
|
| 1,513 |
|
| 1,111 |
Investment in unconsolidated affiliates |
|
| (1,323) |
|
| (81) |
Distributions in excess of earnings received from unconsolidated affiliates |
|
| (32) |
|
| 88 |
Notes receivable issued |
|
| (1,106) |
|
| — |
NET CASH USED IN INVESTING ACTIVITIES |
|
| (9,883) |
|
| (548) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
Payments for financing, debt issuance and lease costs |
|
| (27) |
|
| (272) |
Principal payments on special assessments payable |
|
| (245) |
|
| (141) |
Proceeds from issuance of mortgage notes payable and subordinated debt |
|
| — |
|
| 10,281 |
Principal payments on mortgage notes payable |
|
| (16,330) |
|
| (12,028) |
Advances on lines of credit |
|
| — |
|
| 3,811 |
Payments on lines of credit |
|
| — |
|
| (3,811) |
Proceeds from issuance of shares under optional purchase plan |
|
| 2,411 |
|
| 3,080 |
Shares/units redeemed |
|
| (1,573) |
|
| (2,167) |
Dividends/distributions paid |
|
| (16,333) |
|
| (16,001) |
NET CASH USED IN FINANCING ACTIVITIES |
|
| (32,097) |
|
| (17,248) |
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS |
|
| (7,965) |
|
| 10,555 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD |
|
| 30,065 |
|
| 20,553 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD |
| $ | 22,100 |
| $ | 31,108 |
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 13,685 |
| $ | 16,297 |
Restricted deposits |
|
| 8,415 |
|
| 14,811 |
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD |
| $ | 22,100 |
| $ | 31,108 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 16,890 | | $ | 12,081 |
Adjustments to reconcile net income to net cash from operating activities | | | | | | |
Gain on sale of real estate investments | | | (1,456) | | | — |
Gain on involuntary conversion | | | (52) | | | 487 |
Equity in income of unconsolidated affiliates | | | (363) | | | (629) |
Distributions of earnings of unconsolidated affiliates | | | 363 | | | 629 |
Allowance for uncollectible accounts receivable | | | 52 | | | 125 |
Depreciation | | | 14,716 | | | 14,785 |
Amortization | | | 1,095 | | | 1,390 |
Amortization of debt issuance costs | | | 463 | | | 465 |
Effects on operating cash flows due to changes in | | | | | | �� |
Other assets | | | 2,389 | | | 1,908 |
Tenant security deposits payable | | | 380 | | | 150 |
Accrued expenses and other liabilities | | | 1,511 | | | 2,624 |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 35,988 | | | 34,015 |
INVESTING ACTIVITIES | | | | | | |
Purchase of real estate investment properties | | | (8,397) | | | — |
Capital expenditures and tenant improvements | | | (24,662) | | | (8,935) |
Proceeds from sale of real estate investments and non-real estate investments | | | 5,483 | | | — |
Proceeds from involuntary conversion | | | 1,077 | | | 1,513 |
Investment in unconsolidated affiliates | | | (1,170) | | | (1,323) |
Distributions in excess of earnings received from unconsolidated affiliates | | | 239 | | | (32) |
Notes receivable issued | | | (743) | | | (1,106) |
NET CASH USED IN INVESTING ACTIVITIES | | | (28,173) | | | (9,883) |
FINANCING ACTIVITIES | | | | | | |
Payments for financing, debt issuance and lease costs | | | (349) | | | (27) |
Payments on investment certificates and subordinated debt | | | (50) | | | — |
Principal payments on special assessments payable | | | (290) | | | (245) |
Proceeds from issuance of mortgage notes payable and subordinated debt | | | 22,910 | | | — |
Principal payments on mortgage notes payable | | | (15,249) | | | (16,330) |
Proceeds from issuance of shares under optional purchase plan | | | 2,579 | | | 2,411 |
Shares/units redeemed | | | (2,786) | | | (1,573) |
Dividends/distributions paid | | | (17,012) | | | (16,333) |
NET CASH USED IN FINANCING ACTIVITIES | | | (10,247) | | | (32,097) |
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS | | | (2,432) | | | (7,965) |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD | | | 17,382 | | | 30,065 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD | | $ | 14,950 | | $ | 22,100 |
| | | | | | |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD | | | | | | |
Cash and cash equivalents | | $ | 6,499 | | $ | 13,685 |
Restricted deposits | | | 8,451 | | | 8,415 |
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD | | $ | 14,950 | | $ | 22,100 |
See Notes to Consolidated Financial Statements
7
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED September 30, 20192020 and 20182019 (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2019 |
| 2018 | ||
|
| (in thousands) | ||||
SCHEDULE OF CASH FLOW INFORMATION |
|
|
|
|
| |
Cash paid during the period for interest, net of capitalized interest |
| $ | 13,884 |
| $ | 13,648 |
|
|
|
|
|
|
|
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
Dividends reinvested |
| $ | 4,591 |
| $ | 4,256 |
Dividends declared and not paid |
|
| 2,435 |
|
| 2,248 |
UPREIT distributions declared and not paid |
|
| 4,655 |
|
| 4,470 |
UPREIT units converted to REIT common shares |
|
| 28 |
|
| — |
Shares issued pursuant to trustee compensation plan |
|
| 62 |
|
| 57 |
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT |
|
| — |
|
| 2,176 |
Increase in land improvements due to increase in special assessments payable |
|
| 213 |
|
| 399 |
Unrealized gain on interest rate swaps |
|
| 14 |
|
| 32 |
Acquisition of assets through assumption of debt and liabilities |
|
| — |
|
| 71 |
Capitalized interest and real estate taxes related to construction in progress |
|
| 55 |
|
| 108 |
Acquisition of assets with accounts payable |
|
| — |
|
| 215 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
SCHEDULE OF CASH FLOW INFORMATION | | | | | | |
Cash paid during the period for interest, net of capitalized interest | | $ | 12,381 | | $ | 13,417 |
| | | | | | |
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Dividends reinvested | | $ | 4,836 | | $ | 4,591 |
Dividends declared and not paid | | | 2,577 | | | 2,435 |
UPREIT distributions declared and not paid | | | 4,825 | | | 4,655 |
UPREIT units converted to REIT common shares | | | — | | | 28 |
Shares issued pursuant to trustee compensation plan | | | 64 | | | 62 |
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT | | | 9,031 | | | — |
Increase in land improvements due to increase in special assessments payable | | | 72 | | | 213 |
Unrealized (loss) gain on interest rate swaps | | | (2,125) | | | 14 |
Acquisition of assets with new financing | | | 3,225 | | | — |
Acquisition of assets through assumption of debt and liabilities | | | 538 | | | — |
Capitalized interest and real estate taxes related to construction in progress | | | 524 | | | 55 |
See Notes to Consolidated Financial Statements
8
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.
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 of Sterling Properties, LLLP, Sterling has management responsibility for all activities of the operating partnership. As of September 30, 20192020 and December 31, 2018,2019, Sterling owned approximately 34.34%34.82% and 33.41%34.63%, respectively, of the operating partnership.
NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018,2019, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 20192020 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 20192020 and 2018,2019, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and nine months ended September 30, 2020 and 2019. These adjustments are of a normal recurring nature.
Principles of Consolidation
The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly-owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.
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.
9
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 20182019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Principal Business Activity
Sterling currently owns directly and indirectly 173179 properties. The Trust’s 125132 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 4847 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the Trust’s mix of properties is 73.3%73.7% residential and 26.7%26.3% commercial (based on cost) and total $654,747$682,862 in real estate investments at September 30, 2019.2020. Sterling’s current acquisition strategy and primary focus is on multifamily apartment properties. We currently have no plans to actively market our existing commercial properties for sale. We will consider unsolicited offers for purchase of non-multifamily properties on a case by case basis. Prior to June 30, 2019, Sterling did not account for mezzanine and storage space square footage on their commercial properties. As of June 30, 2019 the addition to this space led to an additional 36,000 square feet of commercial property.
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Residential Property |
| Location |
| No. of Properties |
| Units |
| Location |
| No. of Properties |
| Units |
|
| North Dakota |
| 105 |
| 6,160 | ||||||
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| Minnesota |
| 16 |
| 3,033 | ||||||
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| Missouri |
| 1 |
| 164 | ||||||
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| Nebraska |
| 3 |
| 495 | ||||||
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| 125 |
| 9,852 | ||||||
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| | North Dakota | | 112 | | 6,378 | ||||||
| | Minnesota | | 16 | | 3,147 | ||||||
| | Missouri | | 1 | | 164 | ||||||
| | Nebraska | | 3 | | 495 | ||||||
| | | | 132 | | 10,184 | ||||||
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Commercial Property |
| Location |
| No. of Properties |
| Sq. Ft |
| Location |
| No. of Properties |
| Sq. Ft |
|
| North Dakota |
| 20 |
| 780,000 | ||||||
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| Arkansas |
| 2 |
| 28,000 | ||||||
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| Colorado |
| 1 |
| 17,000 | ||||||
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| Iowa |
| 1 |
| 33,000 | ||||||
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| Louisiana |
| 1 |
| 15,000 | ||||||
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| Michigan |
| 1 |
| 12,000 | ||||||
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| Minnesota |
| 15 |
| 680,000 | ||||||
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| Mississippi |
| 1 |
| 15,000 | ||||||
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| Nebraska |
| 1 |
| 19,000 | ||||||
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| Wisconsin |
| 5 |
| 63,000 | ||||||
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| 48 |
| 1,662,000 | ||||||
| | North Dakota | | 21 | | 826,000 | ||||||
| | Arkansas | | 2 | | 28,000 | ||||||
| | Colorado | | 1 | | 17,000 | ||||||
| | Iowa | | 1 | | 33,000 | ||||||
| | Louisiana | | 1 | | 15,000 | ||||||
| | Michigan | | 1 | | 12,000 | ||||||
| | Minnesota | | 13 | | 664,000 | ||||||
| | Mississippi | | 1 | | 15,000 | ||||||
| | Nebraska | | 1 | | 19,000 | ||||||
| | Wisconsin | | 5 | | 63,000 | ||||||
| | | | 47 | | 1,692,000 | ||||||
Concentration of Credit Risk
Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Real Estate Investments
Real estate investments are recorded at cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred.
10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The CompanyTrust allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, and (v) any assumed financing that is determined to be above or below market, and (vi) goodwill, if any. Transaction costs related to acquisitions accounted for as asset acquisitions are expensedcapitalized as incurred and included within “Administrationas a cost of REIT expenses”the Building in the accompanying consolidated statements of operations and other comprehensive income.balance sheet.
For tangible assets acquired, including land, building and other improvements, the CompanyTrust considers available comparable market and industry information in estimating fair value on the acquisition date fair value.date. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs. The CompanyTrust allocates a portion of the purchase price to the estimated acquired in-place lease value intangibles based on factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, and lease origination costs for similar leases as well as lost rental payments during an assumed lease-up period. The CompanyTrust also evaluates each acquired lease as compared to current market rates. If an acquired lease is determined to be above or below market, the CompanyTrust allocates a portion of the purchase price to such above or below market leases based upon the present value of the difference between the contractual lease payments and estimated market rent payments over the remaining lease term. Renewal periods are included within the lease term in the calculation of above and below market lease values if, based upon factors known at the acquisition date, market participants would consider it reasonably assured that the lessee would exercise such options. Fair value estimates used in acquisition accounting, including the discount rate used, require the CompanyTrust to consider various factors, including, but not limited to, market knowledge, demographics, age and physical condition of the property, geographic location, and size and location of tenant spaces within the acquired investment property.
The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The CompanyTrust incurred amortization expense pertaining to acquired in-place lease value intangibles of $313 and $401 and $473for the three months ended September 30, 20192020 and 2018,2019, respectively and $1,249$970 and $1,516$1,249 for the nine months ended September 30, 2020 and 2019, and 2018, respectively.
The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $54$47 and $55$54 for the three months ended September 30, 20192020 and 2018,2019, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $65$54 and $68$65 for the three months ended September 30, 20192020 and 2018,2019, respectively, was recorded as an increase to real estate rental income. Amortization pertaining to above market lease intangibles of $160$147 and $166$160 for the nine months ended September 30, 20192020 and 2018,2019, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $198$163 and $208$198 for the nine months ended September 30, 20192020 and 2018,2019, respectively, was recorded as an increase to real estate rental income.
11
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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.
11
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(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 |
Depreciation expense for the three months ended September 30, 2020 and 2019 totaled $4,961 and 2018 totaled $4,879, and $4,761, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 totaled $14,716 and 2018 totaled $14,785, and $14,267, respectively.
The Company’sTrust’s investment properties are reviewed for potential impairment at the end of each reporting period whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the CompanyTrust separately determines whether impairment indicators exist for each property.
Examples of situations considered to be impairment indicators include, but are not limited to:
| a substantial decline or continued low occupancy rate; |
| continued difficulty in leasing space; |
| significant financially troubled tenants; |
| a change in plan to sell a property prior to the end of its useful life or holding period; |
| a significant decrease in market price not in line with general market trends; and |
| any other quantitative or qualitative events or factors deemed significant by the |
If the presence of one or more impairment indicators as described above is identified at the end of the reporting period or throughout the year with respect to an investment property, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows. An investment property is considered to be impaired when the estimated future undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair value of an impaired investment property, the CompanyTrust makes complex or subjective assumptions which include, but are not limited to:
| projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location; |
| projected capital expenditures and lease origination costs; |
| projected cash flows from the eventual disposition of an operating property using a property specific capitalization rate; |
| comparable selling prices; and |
| property specific discount rates for fair value estimates as necessary. |
To the extent impairment has occurred, the CompanyTrust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. There were no0 impairment losses during the nine months ended September 30, 20192020 and 2018. 2019.
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STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 20182019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Properties Held for Sale
We account for our properties held for sale in accordance with FASB ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component or group of components of an entity either has been disposed of or is classified as held for sale.
In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of: (1) its carrying amount, or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as properties held for sale in the period in which all of the following criteria are met:
| management, having the authority to approve the action, commits to a plan to sell the asset; |
| the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; |
| an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated; |
| the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; |
| the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and |
| given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. |
The results of operations of a component of an entity that either has been disposed of or is classified as held-for-sale under the requirements of ASC 360 shall be reported in discontinued operations in accordance with FASB ASC 205, Presentation of Financial Statements (“ASC 205”) if such disposal or classification represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
There were no0 properties classified as held for sale at September 30, 20192020 or at December 31, 2018.2019.
Construction in Progress
The CompanyTrust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes and interest and financing costs cease and all project-related costs included in construction in process are reclassified to land and building and other improvements.
Construction in progress as of September 30, 20192020 consists primarily of development and planning costs associated with the Glen Pond developmentGoldmark Office Park building located in Eagan,Fargo, North Dakota, the Montreal Courts Apartment located in Little Canada, Minnesota and the Goldmark Office Park 1715 buildingBayview Apartments located in Fargo, North Dakota. The Glen Pond developmentGoldmark Office Park consists of 114 units of multifamily property.three commercial office buildings. Current expectations are that the project which includes building renovations, reconstruction of portions of the office park and additional amenities will be completed in phases with the second or thirdprimary phase completed in the fourth quarter of calendar year 2020 and the2020. The current project budget approximates $15,598.is approximately $6,790 of which $6,718 has been incurred and is included in construction in progress. The Goldmark Office Park 1715 building isMontreal Courts development consists of a commercial office building.new clubhouse. Current expectations are that the project will be completed in the fourth quarter of calendar year 20192020 and the current project budget approximates $3,752 of which $1,405 has been incurred and is approximately $2,000.included in construction in progress. The Bayview Apartments development consists of new windows and siding. Current expectations are that the project will be completed in the fourth quarter of 2020 and the current project budget approximates $1,893 of which $1,152 has been incurred and is included in construction in progress.
13
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
As of September 30, 2020, the development project at the Glen Pond Apartments located in Eagan, Minnesota, was completed, and the development was put into service. Final cost of the development was $16,540.
Cash, 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 escrow and escrow
13
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
deposits required by lenders on certain properties to be used for future building renovations or tenant improvements and potential Internal Revenue Code Section 1031 tax deferred exchanges (1031 Exchange).
Investment in Unconsolidated Affiliates
We account for unconsolidated affiliates using the equity method of accounting per guidance established under FASB ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings, contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with FASB ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. NoNaN impairment losses were recorded related to the unconsolidated affiliates for the nine months ended September 30, 20192020 and 2018.2019.
We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operations and financial policies of the investee and entities where we have joint control and other attributes resulting in a joint venture. We will also use the equity method for investments that do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. For a joint venture accounted for under the equity method, our share of net earnings and losses is reflected in income when earned and distributions are credited against our investment in the joint venture as received.
In determining whether an investment in a limited liability company or tenant in common arrangement is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns. As of September 30, 2019,2020, our tenant in common arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. As of September 30, 2019,2020, our investment in the joint venture doesventures do not qualify as a variable interest entity, doesentities, as they do not meet the control requirements for consolidation or significant influence requirements, as defined in ASC 810, and doesdo meet the definition of a joint venture.ventures.
As of September 30, 20192020 and December 31, 2018,2019, the unconsolidated affiliates held total assets of $24,710$49,125 and $22,954$31,261 and mortgage notes payable of $16,793$29,072 and $17,091,$16,690, respectively.
The operating partnership is a 50% owner of a retail center as a tenant in common through 100% ownership in a limited liability company. The retail center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 20192020 and December 31, 20182019 of $10,320$10,095 and $10,483,$10,264, respectively. The CompanyTrust is jointly and severally liable for the full mortgage balance.
14
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 20192020 and December 31, 20182019 of $6,473$6,282 and $6,608,$6,426, respectively. The CompanyTrust is jointly and severally liable for the full mortgage balance.
14
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The operating partnership owns a 60% interest in a joint venture (“SE Savage”)limited liability company that is developing a 190 unit multifamily property in Savage, Minnesota. The property is encumbered by a first construction mortgage with a balance at September 30, 2020 of $11,030 and 0 mortgage balance at December 31, 2019. The operating partnership has contributed $3,305 in cash as of September 30, 2020. The limited liability company holds total assets of $19,528. The Trust is jointly and severally liable for the full mortgage balance.
The operating partnership owns a 60% interest in a limited liability company that intends to develop a 190160 unit multifamily property.property in Maple Grove, Minnesota. The property is encumbered by a first construction mortgage with a balance at September 30, 2020 of $1,665 and 0 mortgage balance at December 31, 2019. The operating partnership has contributed $1,323$3,098 in cash to SE Savage duringas of September 2019. SE Savage30, 2020. The limited liability company holds land located in Savage,Maple Grove, Minnesota, total assets of $2,205,$7,668. The Trust is jointly and noseverally liable for the full mortgage payable. balance.
Receivables
Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, beginning with the adoption of ASC 842 as of January 1, 2019, the operating partnership recognizes an adjustment to rental income. Prior to the adoption of ASC 842, The Company recognized a provision for uncollectible amounts or a direct write-off of the specific rent receivable.
Notes receivable are issued periodically and are secured and interest bearing. Receivables are included in “Other assets” in the accompanying consolidated balance sheets.
Financing and Lease Costs
Financing costs have been capitalized and are being amortized over the life of the financing (line of credit) using the effective interest method. Unamortized financing costs are written off when debt is retired before the maturity date and included in interest expense at that time. Financing costs are included in “Other assets” in the accompanying consolidated balance sheets.
Lease costs incurred in connection with new leases have been capitalized and are being amortized over the life of the lease using the straight-line method. We record the amortization of leasing costs in depreciation and amortization on the consolidated statements of operations and comprehensive income. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense. Lease costs are included
15
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in “Other assets” in the accompanying consolidated balance sheets.thousands, except share and per share data)
Debt Issuance Costs
We amortize external debt issuance costs using the effective interest rate method, over the estimated life of the related debt. We record debt issuance costs related to notes and mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit on our consolidated balance sheets as financing fees, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.
Lease Intangible Assets
Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases, tenant relationships and the value of leases with above or below market lease terms. Lease intangibles are amortized over the term of the related lease.
The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no0 impairment charges were necessary at September 30, 20192020 and December 31, 2018.2019.
15
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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 comprehensive income.
Operating Partnership: Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.
Partially Owned Properties: The CompanyTrust reflects noncontrolling interests in partially owned properties (not wholly owned by the Trust) on the balance sheet for the portion of properties consolidated by the Company that are not wholly owned by the Company.Trust. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interests in partially owned properties in the consolidated statement of operations and comprehensive income.
Syndication Costs
Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to beneficial and noncontrolling interest.
Federal Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid.
16
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in generally the same manner as they are taxed on other corporate distributions.
We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, no0 provisions or liabilities for income taxes have been recorded in the financial statements.
Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP. The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.
We follow FASB ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 20192020 and December 31, 20182019 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our
16
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2015.2016.
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 areThe Trust is the lessor for ourits residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of September 30, 2020, all leases and these leases will continueanalyzed under the Trust’s lease classification process were determined to be accounted for as operating leases under the new standard as described under Recent Accounting Pronouncements. Therefore, the Company did not have significant changes in accounting for lease revenues.leases.
As of September 30, 2019,2020, we derived 83%approximately 80% 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 the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.
As of September 30, 2019,2020, we derived 17%approximately 20% of our revenues from commercial leases primarily under long-term lease agreements. We elected to apply the package of practical expedients for the commercial leases and these leases will continue to be accounted for as operating leases as of January 1, 2019. 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 when earned 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,
17
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
excluding real estate taxes” and “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 decreased revenue by $39$31 and increased revenue by $17$39 for the three months ended September 30, 20192020 and 2018,2019, respectively. The straight-line rent adjustment decreased revenue by $169 and increased revenue by $17 and $87 the nine months ended September 30, 20192020 and 2018,2019, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, 20192020 and December 31, 20182019 was $3,391$2,982 and $3,374,$3,331, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.
Upon adoption of ASU 2016-02 on January 1, 2019, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease component is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental
17
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
income” beginning January 1, 2019 in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental income.
Lease income related to the Company’sTrust’s operating leases is comprised of the following:
| | | | | | | | | | |||||||||
| | Three months ended September 30, 2020 | ||||||||||||||||
|
| Residential |
| Commercial |
| Total | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Nine months ended September 30, 2019 | ||||||||||||||||
As of September 30, 2019 |
| Residential |
| Commercial |
| Total | ||||||||||||
|
| (in thousands) | ||||||||||||||||
| | (in thousands) | ||||||||||||||||
Lease income related to fixed lease payments |
| $ | 68,938 |
| $ | 14,675 |
| $ | 83,613 | | $ | 24,080 | | $ | 4,630 | | $ | 28,710 |
Lease income related to variable lease payments |
|
| — |
|
| 4,570 |
|
| 4,570 | | | — | | | 1,352 | | | 1,352 |
Other (a) |
|
| (706) |
|
| 55 |
|
| (651) | | | (170) | | | (36) | | | (206) |
Lease Income (b) |
| $ | 68,232 |
| $ | 19,300 |
| $ | 87,532 | | $ | 23,910 | | $ | 5,946 | | $ | 29,856 |
| | | | | | | | | |
| | Three months ended September 30, 2019 | |||||||
|
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Lease income related to fixed lease payments | | $ | 23,064 | | $ | 4,969 | | $ | 28,033 |
Lease income related to variable lease payments | | | — | | | 1,531 | | | 1,531 |
Other (a) | | | (301) | | | (27) | | | (328) |
Lease Income (b) | | $ | 22,763 | | $ | 6,473 | | $ | 29,236 |
(a) | For the |
(b) | Excludes other rental income for the |
18
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, 2019 | |||||||
As of September 30, 2019 |
| Residential |
| Commercial |
| Total | |||
|
| (in thousands) | |||||||
Lease income related to fixed lease payments |
| $ | 23,064 |
| $ | 4,969 |
| $ | 28,033 |
Lease income related to variable lease payments |
|
| — |
|
| 1,531 |
|
| 1,531 |
Other (a) |
|
| (301) |
|
| (27) |
|
| (328) |
Lease Income (b) |
| $ | 22,763 |
| $ | 6,473 |
| $ | 29,236 |
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
| | | | | | | | | |
| | Nine months ended September 30, 2020 | |||||||
|
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Lease income related to fixed lease payments | | $ | 70,896 | | $ | 14,378 | | $ | 85,274 |
Lease income related to variable lease payments | | | — | | | 4,064 | | | 4,064 |
Other (a) | | | (512) | | | (202) | | | (714) |
Lease Income (b) | | $ | 70,384 | | $ | 18,240 | | $ | 88,624 |
| | | | | | | | | |
| | Nine months ended September 30, 2019 | |||||||
|
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Lease income related to fixed lease payments | | $ | 68,938 | | $ | 14,675 | | $ | 83,613 |
Lease income related to variable lease payments | | | — | | | 4,570 | | | 4,570 |
Other (a) | | | (706) | | | 55 | | | (651) |
Lease Income (b) | | $ | 68,232 | | $ | 19,300 | | $ | 87,532 |
(a) | For the |
(b) | Excludes other rental income for the |
As of September 30, 2019,2020, non-cancelable in place commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.
|
|
|
| |||
| | | | |||
Years ending December 31, |
| Amount |
| Amount | ||
|
| (in thousands) | ||||
2019 (October 1, 2019 to December 31, 2019) |
| $ | 4,652 | |||
2020 |
|
| 17,578 | |||
| | (in thousands) | ||||
2020 (October 1, 2020 - December 31, 2020) | | $ | 4,408 | |||
2021 |
|
| 14,333 | | | 16,698 |
2022 |
|
| 10,958 | | | 14,170 |
2023 |
|
| 9,205 | | | 12,426 |
2024 | | | 11,666 | |||
Thereafter |
|
| 51,699 | | | 59,879 |
|
| $ | 108,425 | |||
| | $ | 119,247 | |||
Business Interruption Proceeds
In the Trust’s normal course of business we periodically receive insurance recoveries for business interruption. The Trust received insurance recoveries for business interruption of $521 and $768 during the nine months ended September 30, 2020 and 2019. When insurance proceeds are received they are reflected in the statement of operations as real estate rental income.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had no0 dilutive potential common shares as of September 30, 20192020 and 2018,2019, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.
1819
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 20182019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
For the three months ended September 30, 20192020 and 2018,2019, Sterling’s denominators for both basic and diluted earnings per common share were approximately 9,322,0009,740,000 and 8,840,000,9,322,000, respectively. For the nine months ended September 30, 20192020 and 2018,2019, Sterling’s denominators for the basic and diluted earnings per common share were approximately 9,208,0009,638,000 and 8,730,000,9,208,000, respectively.
ReclassificationsIncurred but Not Reported Insurance Liability
The Trust maintains a business insurance program with deductible limits, which covers property, business automobile and general liability claims. The Trust accrues estimated losses using a reserve for known claims and estimates based on historical loss experience. The calculations used to estimate property claim reserves are based on numerous assumptions, some of which are subjective. The Trust will adjust the property claim reserves, if necessary, in the event future loss experience differs from historical loss patterns. As of September 30, 2020 and December 31, 2019, property claim reserves were $1,084 and $204, respectively, and are included in accrued expenses and other liabilities on the consolidated balance sheet.
Reclassifications
Certain reclassifications considered necessary for a fair presentation have been made to the prior period financial statements in order to conform to the current year presentation. These reclassifications have not changed the results of operations or equity.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The standard provides for optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. On July 27, 2017, the Financial Conduct Authority (FCA), tasked with overseeing the London Interbank Offered Rate (LIBOR) announced the benchmark interest rate will be phased out by the end of 2021. As a result, existing and future contracts indexed to LIBOR will need to be renegotiated to reference another rate.
We adopted the standard effective as of January 1, 2020, using the optional transition method to apply the standard as of the effective date. The Trust elected to apply the optional expedients for all of the Trust’s hedging relationships. The Trust will disregard the potential change in the designated hedged risk that may occur due to reference rate reform when the Trust assesses whether the hedged forecasted transaction is probable in accordance with the requirements of Topic 815. The Trust will continue current hedge accounting for our existing cash flow hedges when the hedged risk changes by assuming the reference rate will not be replaced for the remainder of the hedging relationships for our assessment of hedge effectiveness and all subsequent hedge effectiveness assessments.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which superseded FASB ASC Topic 840. The standard for operating leases as lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating and finance leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term.
The newWe adopted this standard was effective for the Company effectiveas of January 1, 2019. The new standard was adopted2019, using the optional transition method to apply the standard as of the effective date. The CompanyTrust elected to apply the package of practical expedients for the leases as lessor for its residential
20
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
and commercial leases and these leases will continue to be accounted for as operating leases as of the effective date. Further, the CompanyTrust elected the practical expedient to combine lease and nonlease components for leases as lessor. Finally, the CompanyTrust evaluated taxes collected from lessees, lessor costs paid directly by lessees, and initial direct costs and determined that the guidance was consistent with existing practice. Based on these evaluations, the CompanyTrust determined that for leases as lessor, as of January 1, 2019, there was no impact on lease revenue or related expenses.
In April 2020, the FASB met to discuss lease modifications guidance in Topic 842 as it relates to lease concessions amidst the COVID-19 pandemic. The FASB determined that requiring the analysis of all leases in which concessions are made would be costly and complex for both the lessees and lessors. As such, the FASB has made the decision to allow companies to avoid lease modification accounting when lease concessions do not result in a significant change in cash flow. The Trust has elected to apply the lease modification guidance in Topic 842 for concessions and deferrals made during the COVID-19 pandemic as it relates to the Trust’s residential leases, as the cash flows related to these concessions and deferrals do not cause a significant change in the cash received from the leases.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.
NOTE 3 – segment reporting
We report our results in two2 reportable segments: residential and commercial properties. Our residential properties include multifamily properties. Our commercial properties include retail, office, industrial, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and 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 and certain general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.
19
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Segment Revenues and Net Operating Income
The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and nine months ended September 30, 20192020 and 2018,2019, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
| | Three months ended September 30, 2020 | | Three months ended September 30, 2019 | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Three months ended September 30, 2019 |
| Three months ended September 30, 2018 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||||||||||||||||||||
|
| (in thousands) |
| (in thousands) | ||||||||||||||||||||||||||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||||||||||||||
Income from rental operations |
| $ | 23,662 |
| $ | 6,511 |
| $ | 30,173 |
| $ | 22,439 |
| $ | 6,616 |
| $ | 29,055 | | $ | 24,858 | | $ | 6,008 | | $ | 30,866 | | $ | 23,662 | | $ | 6,511 | | $ | 30,173 |
Expenses from rental operations |
|
| 13,570 |
|
| 1,810 |
|
| 15,380 |
|
| 12,247 |
|
| 1,953 |
|
| 14,200 | | | 13,506 | | | 1,796 | | | 15,302 | | | 13,570 | | | 1,810 | | | 15,380 |
Net operating income |
| $ | 10,092 |
| $ | 4,701 |
| $ | 14,793 |
| $ | 10,192 |
| $ | 4,663 |
| $ | 14,855 | | $ | 11,352 | | $ | 4,212 | | $ | 15,564 | | $ | 10,092 | | $ | 4,701 | | $ | 14,793 |
Depreciation and amortization |
|
|
|
|
|
|
|
| 5,322 |
|
|
|
|
|
|
|
| 5,274 | | | | | | | | | 5,328 | | | | | | | | | 5,322 |
Interest |
|
|
|
|
|
|
|
| 4,521 |
|
|
|
|
|
|
|
| 4,557 | | | | | | | | | 4,187 | | | | | | | | | 4,521 |
Administration of REIT |
|
|
|
|
|
|
|
| 969 |
|
|
|
|
|
|
|
| 1,460 | | | | | | | | | 972 | | | | | | | | | 969 |
Other (income)/expense |
|
|
|
|
|
|
|
| 511 |
|
|
|
|
|
|
|
| (3,520) | | | | | | | | | (189) | | | | | | | | | 511 |
Net income |
|
|
|
|
|
|
| $ | 3,470 |
|
|
|
|
|
|
| $ | 7,084 | | | | | | | | $ | 5,266 | | | | | | | | $ | 3,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2019 |
| Nine months ended September 30, 2018 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
|
| (in thousands) |
| (in thousands) | ||||||||||||||
Income from rental operations |
| $ | 70,920 |
| $ | 19,355 |
| $ | 90,275 |
| $ | 66,683 |
| $ | 20,119 |
| $ | 86,802 |
Expenses from rental operations |
|
| 39,954 |
|
| 5,485 |
|
| 45,439 |
|
| 37,093 |
|
| 5,562 |
|
| 42,655 |
Net operating income |
| $ | 30,966 |
| $ | 13,870 |
| $ | 44,836 |
| $ | 29,590 |
| $ | 14,557 |
| $ | 44,147 |
Depreciation and amortization |
|
|
|
|
|
|
|
| 16,213 |
|
|
|
|
|
|
|
| 15,907 |
Interest |
|
|
|
|
|
|
|
| 13,819 |
|
|
|
|
|
|
|
| 13,632 |
Administration of REIT |
|
|
|
|
|
|
|
| 3,051 |
|
|
|
|
|
|
|
| 3,703 |
Other (income)/expense |
|
|
|
|
|
|
|
| (328) |
|
|
|
|
|
|
|
| (6,416) |
Net income |
|
|
|
|
|
|
| $ | 12,081 |
|
|
|
|
|
|
| $ | 17,321 |
Segment Assets and Accumulated Depreciation
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019 |
| Residential |
| Commercial |
| Total | |||
|
| (in thousands) | |||||||
Real estate investments |
| $ | 601,574 |
| $ | 194,903 |
| $ | 796,477 |
Accumulated depreciation |
|
| (100,837) |
|
| (40,893) |
|
| (141,730) |
|
| $ | 500,737 |
| $ | 154,010 |
|
| 654,747 |
Cash and cash equivalents |
|
|
|
|
|
|
|
| 13,685 |
Restricted deposits and funded reserves |
|
|
|
|
|
|
|
| 8,415 |
Investment in unconsolidated affiliates |
|
|
|
|
|
|
|
| 4,046 |
Other assets |
|
|
|
|
|
|
|
| 7,558 |
Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
| 9,567 |
Total Assets |
|
|
|
|
|
|
| $ | 698,018 |
2021
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 20182019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Income from rental operations | | $ | 73,234 | | $ | 18,359 | | $ | 91,593 | | $ | 70,920 | | $ | 19,355 | | $ | 90,275 |
Expenses from rental operations | | | 39,978 | | | 5,124 | | | 45,102 | | | 39,954 | | | 5,485 | | | 45,439 |
Net operating income | | $ | 33,256 | | $ | 13,235 | | $ | 46,491 | | $ | 30,966 | | $ | 13,870 | | $ | 44,836 |
Depreciation and amortization | | | | | | | | | 15,826 | | | | | | | | | 16,213 |
Interest | | | | | | | | | 12,761 | | | | | | | | | 13,819 |
Administration of REIT | | | | | | | | | 3,218 | | | | | | | | | 3,051 |
Other (income)/expense | | | | | | | | | (2,204) | | | | | | | | | (328) |
Net income | | | | | | | | $ | 16,890 | | | | | | | | $ | 12,081 |
Segment Assets and Accumulated Depreciation
| | | | | | | | | |
As of September 30, 2020 |
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Real estate investments | | $ | 637,741 | | $ | 204,275 | | $ | 842,016 |
Accumulated depreciation | | | (114,955) | | | (44,199) | | | (159,154) |
| | $ | 522,786 | | $ | 160,076 | | | 682,862 |
Cash and cash equivalents | | | | | | | | | 6,499 |
Restricted deposits and funded reserves | | | | | | | | | 8,451 |
Investment in unconsolidated affiliates | | | | | | | | | 8,846 |
Note receivable | | | | | | | | | 2,043 |
Intangible assets, less accumulated amortization | | | | | | | | | 7,671 |
Other assets, net | | | | | | | | | 7,049 |
Total Assets | | | | | | | | $ | 723,421 |
| | | | | | | | | |
As of December 31, 2019 |
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Real estate investments | | $ | 605,813 | | $ | 196,215 | | $ | 802,028 |
Accumulated depreciation | | | (104,170) | | | (42,146) | | | (146,316) |
| | $ | 501,643 | | $ | 154,069 | | | 655,712 |
Cash and cash equivalents | | | | | | | | | 9,002 |
Restricted deposits and funded reserves | | | | | | | | | 8,380 |
Investment in unconsolidated affiliates | | | | | | | | | 7,915 |
Note receivable | | | | | | | | | 1,300 |
Intangible assets, less accumulated amortization | | | | | | | | | 9,133 |
Other assets, net | | | | | | | | | 8,244 |
Total Assets | | | | | | | | $ | 699,686 |
22
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018 |
| Residential |
| Commercial |
| Total | |||
|
| (in thousands) | |||||||
Real estate investments |
| $ | 595,006 |
| $ | 195,690 |
| $ | 790,696 |
Accumulated depreciation |
|
| (90,143) |
|
| (37,969) |
|
| (128,112) |
|
| $ | 504,863 |
| $ | 157,721 |
|
| 662,584 |
Cash and cash equivalents |
|
|
|
|
|
|
|
| 21,212 |
Restricted deposits and funded reserves |
|
|
|
|
|
|
|
| 8,853 |
Investment in unconsolidated affiliates |
|
|
|
|
|
|
|
| 2,691 |
Other assets |
|
|
|
|
|
|
|
| 8,151 |
Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
| 10,976 |
Total Assets |
|
|
|
|
|
|
| $ | 714,467 |
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 4 - Lease intangibles
The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:
|
|
|
|
|
|
|
|
|
|
|
| Lease |
| Accumulated |
| Lease | |||
As of September 30, 2019 |
| Intangibles |
| Amortization |
| Intangibles, net | |||
Lease Intangible Assets |
| (in thousands) | |||||||
In-place leases |
| $ | 21,480 |
| $ | (13,671) |
| $ | 7,809 |
Above-market leases |
|
| 3,211 |
|
| (1,453) |
|
| 1,758 |
|
| $ | 24,691 |
| $ | (15,124) |
| $ | 9,567 |
Lease Intangible Liabilities |
|
|
|
|
|
|
|
|
|
Below-market leases |
| $ | (3,088) |
| $ | 1,819 |
| $ | (1,269) |
| | | | | | | | | | |||||||||
| | Lease | | Accumulated | | Lease | ||||||||||||
As of September 30, 2020 |
| Intangibles |
| Amortization |
| Intangibles, net | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Lease |
| Accumulated |
| Lease | ||||||||||||
As of December 31, 2018 |
| Intangibles |
| Amortization |
| Intangibles, net | ||||||||||||
Lease Intangible Assets |
| (in thousands) | | (in thousands) | ||||||||||||||
In-place leases |
| $ | 21,480 |
| $ | (12,422) |
| $ | 9,058 | | $ | 20,197 | | $ | (13,891) | | $ | 6,306 |
Above-market leases |
|
| 3,211 |
|
| (1,293) |
|
| 1,918 | | | 2,619 | | | (1,254) | | | 1,365 |
|
| $ | 24,691 |
| $ | (13,715) |
| $ | 10,976 | |||||||||
| | $ | 22,816 | | $ | (15,145) | | $ | 7,671 | |||||||||
Lease Intangible Liabilities |
|
|
|
|
|
|
|
|
| | | | | | | | | |
Below-market leases |
| $ | (3,089) |
| $ | 1,621 |
| $ | (1,468) | | $ | (3,031) | | $ | 1,987 | | $ | (1,044) |
| | | | | | | | | |
| | Lease | | Accumulated | | Lease | |||
As of December 31, 2019 |
| Intangibles |
| Amortization |
| Intangibles, net | |||
Lease Intangible Assets | | (in thousands) | |||||||
In-place leases | | $ | 21,480 | | $ | (14,051) | | $ | 7,429 |
Above-market leases | | | 3,211 | | | (1,507) | | | 1,704 |
| | $ | 24,691 | | $ | (15,558) | | $ | 9,133 |
Lease Intangible Liabilities | | | | | | | | | |
Below-market leases | | $ | (3,088) | | $ | 1,881 | | $ | (1,207) |
21
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
|
|
|
|
|
|
|
|
| Intangible |
| Intangible | ||
Years ending December 31, |
| Assets |
| Liabilities | ||
|
| (in thousands) | ||||
2019 (October 1, 2019 to December 31, 2019) |
| $ | 434 |
| $ | 62 |
2020 |
|
| 1,456 |
|
| 213 |
2021 |
|
| 1,163 |
|
| 184 |
2022 |
|
| 1,028 |
|
| 164 |
2023 |
|
| 891 |
|
| 151 |
Thereafter |
|
| 4,595 |
|
| 495 |
|
| $ | 9,567 |
| $ | 1,269 |
| | | | | | |
| | Intangible | | Intangible | ||
Years ending December 31, |
| Assets |
| Liabilities | ||
| | (in thousands) | ||||
2020 (October 1, 2020 - December 31, 2020) | | $ | 304 | | $ | 49 |
2021 | | | 1,121 | | | 184 |
2022 | | | 987 | | | 164 |
2023 | | | 849 | | | 151 |
2024 | | | 849 | | | 151 |
Thereafter | | | 3,561 | | | 345 |
| | $ | 7,671 | | $ | 1,044 |
The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 20192020 was 6.7 years.
NOTE 5 – LINES OF CREDIT
We have a $18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2021;2021; a $6,315$4,915 variable rate (prime rate less 0.5%(floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires in November 2019;June 2022; a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires June 2022;2022; and a $3,200 variable rate (LIBOR plus 2.04%) line of credit agreement with Bank of the West, which expires November 2020.2020. The lines of credit are secured by properties in Duluth, Edina, Moorhead, and St. Cloud, Minnesota; and Bismarck, Dickinson, Grand Forks and Fargo, North Dakota. At September 30, 2019, there was no balance outstanding on2020, the linesBremer line of credit secured 2 letters of credit totaling $1,216, leaving $32,815$30,199 available and unused under the agreements.
23
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Certain line of credit agreements includes covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios on an annual and semi-annaulsemi-annual basis. As of September 30, 2020, we were in compliance with all measured debt covenants. As of December 31, 2018, three2019, 3 residential properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. As of December 31, 2018, the pooled property debt yieldAn annual waiver was out of compliance with Wells Fargo’s requirement. Annual waivers were received from the lenders.lender.
NOTE 6 - MORTGAGE NOTES PAYABLE
The following table summarizes the Company’sTrust’s mortgage notes payable.
| | | | | | |
| | Principal Balance At | ||||
| | September 30, | | December 31, | ||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Fixed rate mortgage notes payable (a) | | $ | 405,924 | | $ | 395,038 |
Less unamortized debt issuance costs | | | 1,810 | | | 1,874 |
| | $ | 404,114 | | $ | 393,164 |
|
|
|
|
|
|
|
|
| Principal Balance At | ||||
|
| September 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (in thousands) | ||||
Fixed rate mortgage notes payable (a) |
| $ | 392,009 |
| $ | 408,339 |
Less unamortized debt issuance costs |
|
| 1,917 |
|
| 2,322 |
|
| $ | 390,092 |
| $ | 406,017 |
| (a) |
| Includes |
As of September 30, 2019,2020, we had 122119 mortgage loans with effective interest rates ranging from 3.54%2.43% to 6.85% per annum and a weighted average effective interest rate of 4.13% per annum.
As of December 31, 2019, we had 121 mortgage loans with effective interest rates ranging from 3.15% to 7.25% per annum, and a weighted average effective interest rate of 4.40%4.31% per annum.
22
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
As of December 31, 2018, we had 127 mortgage loans with effective interest rates ranging from 3.44% to 7.25% per annum, and a weighted average effective interest rate of 4.42% per annum.
The majority of the Company’sTrust’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs. Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits.
Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. We are not required to determine compliance with our covenants as of September 30, 2020; however, we have not received any notice of non-compliance with our covenants through the date of this filing. As of December 31, 2018, nine2019, 10 loans on residential properties were out of compliance with annual loan covenants due to various unit renovation and parking lot repair and maintenance costs, bad debts and increased vacancies in the North Dakota markets. The loans were secured by properties located in Bismarck, Fargo and Grand Forks, North Dakota with a total outstanding balance of $13,128$16,361 at December 31, 2018.2019. Annual waivers have beenwere received from the lenders. lenders on $10,435 of the loans out of compliance. Annual waivers were not received from 1 lender on loans with a balance of $5,926. The Trust elected to pay the loans off in March 2020 with no penalty.
24
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:
|
|
|
| |||
| | | | |||
Years ending December 31, |
| Amount |
| Amount | ||
|
| (in thousands) | ||||
2019 (October 1, 2019 to December 31, 2019) |
| $ | 9,281 | |||
2020 |
|
| 28,011 | |||
| | (in thousands) | ||||
2020 (October 1, 2020 - December 31, 2020) | | $ | 8,126 | |||
2021 |
|
| 46,541 | | | 27,580 |
2022 |
|
| 31,788 | | | 25,841 |
2023 |
|
| 48,046 | | | 49,115 |
2024 | | | 18,076 | |||
Thereafter |
|
| 228,342 | | | 277,186 |
Total payments |
| $ | 392,009 | | $ | 405,924 |
NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES
As part of our interest rate risk management strategy, we have used derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variablemanage our exposure to interest rate costsmovements 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 September 30, 2020, the Trust used 8 interest rate swaps to hedge the variable cash flows associated with existing borrowings. To meet these objectives, we enteredvariable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive loss and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. Over the next three months, the Trust estimates that an additional $93 will be reclassified as an increase to interest expense.
The following table summarizes the Trust’s interest rate swapswaps as of September 30, 2020, which effectively convert on month floating rate LIBOR to a fixed rate:
| | | | | | |
| | | | Fixed | | |
Effective Date | | Notional | | Interest Rate | | Maturity Date |
November 1, 2019 | $ | 7,026 | | 3.15% | | November 1, 2029 |
November 1, 2019 | $ | 4,881 | | 3.28% | | November 1, 2029 |
January 10, 2020 | $ | 3,171 | | 3.39% | | January 10, 2030 |
June 12, 2020 | $ | 1,590 | | 3.07% | | June 15, 2030 |
June 12, 2020 | $ | 3,081 | | 3.07% | | June 15, 2030 |
June 15, 2020 | $ | 1,724 | | 2.94% | | June 15, 2030 |
June 15, 2020 | $ | 4,561 | | 2.94% | | June 15, 2030 |
July 1, 2020 | $ | 4,983 | | 2.79% | | June 10, 2030 |
The following table summarizes the Trust’s interest rate swaps that were designated as cash flow hedges of interest rate risk:
| | | | | | | | |
| | Number of Instruments | | Notional | ||||
Interest Rate Derivatives | | September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
Interest rate swaps | | 8 | | 3 | $ | 31,017 | $ | 12,960 |
The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the notional amountaccompanying consolidated balance sheets. The valuation techniques are described in Note 8 to the consolidated financial statements.
25
Table of $1,294 to provide a fixed rate of 7.25% that maturesContents
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in April 2020. The swap was issued at approximate market termsthousands, except share and thus no fair value adjustment was recorded at inception.per share data)
| | | | | | | | |
| | Derivatives | ||||||
Derivatives designated as | | September 30, 2020 | | December 31, 2019 | ||||
cash flow hedges: | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Interest rate swaps | | Other assets, net | $ | — | | Other assets, net | $ | 58 |
Interest rate swaps | | Accrued expenses and other liabilities | $ | 2,088 | | Accrued expenses and other liabilities | $ | 21 |
The carrying amount of the swap hasswaps have been adjusted to itstheir fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps.swap. The interest rate swap is accounted for as an effective hedge in accordance with FASB ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to accumulated comprehensive income. The following table presents the effect of the Trust’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended September 30, 2020 and 2019:
| | | | | | |
| | | | | | |
| | | | Location of Gain | | |
| | Amount of (Gain)/Loss | | Reclassified from | | Amount of (Gain)/Loss |
Derivatives in | | Recognized in Other | | Accumulated other | | Reclassified from |
Cash Flow Hedging | | Comprehensive Income | | Comprehensive Income | | AOCI into Income |
Relationships | | on Derivatives | | (AOCI) into Income | | Nine Months Ended |
| | 2020 | | | | 2020 |
Interest rate swaps | $ | 2,125 | | Interest expense | $ | 145 |
| | 2019 | | | | 2019 |
Interest rate swaps | $ | (14) | | Interest expense | $ | 22 |
Credit-risk-related Contingent Features
The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Trust could also be declared in default on its corresponding derivative obligation.
The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of September 30, 2019 and December 31, 2018, we recorded2020, the termination value of derivatives in a liability position, which includes accrued interest and other accumulated comprehensive lossadjustment for non-performance risk, which the Trust has deemed not significant, was $2,088. As of $16 and $30, respectively.September 30, 2020, the Trust has pledged the properties related to the loans which are hedged as collateral. As of September 30, 2020, if the Trust had breached any of these provisions it could have been required to settle its obligations under the agreements at their termination value of $2,088.
2326
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 20182019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 8 - FAIR VALUE MEASUREMENT
The following table presents the carrying value and estimated fair value of the Company’sTrust’s financial instruments:
| | | | | | | | | | | | | ||||||||||||
| | September 30, 2020 | | December 31, 2019 | ||||||||||||||||||||
| | Carrying | | | | | Carrying | | | | ||||||||||||||
|
| Value |
| Fair Value |
| Value |
| Fair Value | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| September 30, 2019 |
| December 31, 2018 | ||||||||||||||||||||
|
| Carrying |
|
|
|
| Carrying |
|
|
| ||||||||||||||
|
| Value |
| Fair Value |
| Value |
| Fair Value | ||||||||||||||||
|
| (in thousands) | ||||||||||||||||||||||
| | (in thousands) | ||||||||||||||||||||||
Financial assets: | | | | | | | | | | | | | ||||||||||||
Note receivable | | $ | 2,043 | | $ | 2,156 | | $ | 1,300 | | $ | 1,389 | ||||||||||||
Derivative assets | | $ | — | | $ | — | | $ | 58 | | $ | 58 | ||||||||||||
| | | ||||||||||||||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Mortgage notes payable, net |
| $ | 390,092 |
| $ | 408,491 |
| $ | 406,017 |
| $ | 400,192 | | $ | 404,114 | | $ | 439,341 | | $ | 393,164 | | $ | 415,183 |
Fair value of interest rate swaps |
| $ | 16 |
| $ | 16 |
| $ | 30 |
| $ | 30 | ||||||||||||
Derivative liabilities | | $ | 2,088 | | $ | 2,088 | | $ | 21 | | $ | 21 | ||||||||||||
The carrying values shown in the table are included in the consolidated balance sheets under the indicated captions.
ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.
These two types of inputs create the following fair value hierarchy:
| Level 1 – Quoted prices for identical instruments in active markets; |
| Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; |
| Level 3 – Instruments whose significant inputs are unobservable. |
The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Company’sTrust’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
| | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
September 30, 2020 | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | 2,088 | | $ | — | | $ | 2,088 |
December 31, 2019 | | | | | | | | | | | | |
Derivative assets | | $ | — | | $ | 58 | | $ | | | $ | 58 |
Derivative liabilities | | $ | — | | $ | 21 | | $ | — | | $ | 21 |
| | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
| (in thousands) | ||||||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest rate swaps |
| $ | — |
| $ | 16 |
| $ | — |
| $ | 16 |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest rate swaps |
| $ | — |
| $ | 30 |
| $ | — |
| $ | 30 |
27
Fair value of interest rate swaps:STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Derivatives: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The CompanyTrust also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
24
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Although the CompanyTrust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 20192020 and December 31, 2018,2019, the CompanyTrust has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the CompanyTrust has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the CompanyTrust has considered any applicable credit enhancements. The Company’sTrust’s derivative instruments are further described in Note 7.
Fair Value Disclosures
The following table presents the Company’sTrust’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
| (in thousands) | ||||||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable, net |
| $ | — |
| $ | — |
| $ | 408,491 |
| $ | 408,491 |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable, net |
| $ | — |
| $ | — |
| $ | 400,192 |
| $ | 400,192 |
| | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | | | | | | | | | | | |
| | (in thousands) | ||||||||||
September 30, 2020 | | | | | | | | | | | | |
Mortgage notes payable, net | | $ | — | | $ | — | | $ | 439,341 | | $ | 439,341 |
Note receivable | | $ | — | | $ | — | | $ | 2,156 | | $ | 2,156 |
December 31, 2019 | | | | | | | | | | | | |
Mortgage notes payable, net | | $ | — | | $ | — | | $ | 415,183 | | $ | 415,183 |
Note receivable | | $ | — | | $ | — | | $ | 1,389 | | $ | 1,389 |
Mortgage notes payable: The CompanyTrust estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the CompanyTrust for similar debt instruments of comparable maturities by the Company’sTrust’s lenders. Judgment is used in determining the appropriate rate for each of the Company’sTrust’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 3.60%3.05% to 3.60%3.20% and from 4.82%3.75% to 4.83%3.80% at September 30, 20192020 and December 31, 2018,2019, respectively. The fair value of the Company’sTrust’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of September 30, 20192020 and December 31, 2018.2019. The Company’sTrust’s mortgage notes payable are further described in Note 6.
Notes receivable: The Trust estimates the fair value of its notes receivable by discounting the future cash flows of each note at rates currently offered to the Trust for debt instruments. Judgment is used in determining the appropriate rate for each of the Trust’s individual note receivable based upon the specific terms of the agreement, including the term to maturity, and the quality and nature of the individual note. The rates used range from 3.05% to 3.20% and from 3.75% to 3.80% at September 30, 2020 and December 31, 2019, respectively.
28
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 9 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP
As of September 30, 20192020 and December 31, 2018,2019, outstanding limited partnership units totaled 17,820,00018,229,000 and 17,876,00017,811,000 respectively. For the three months ended September 30, 20192020 and 2018,2019, the operating partnership declared distributions of $4,655$4,825 and $4,470$4,655 respectively, to limited partners which were paid on October 15, 20192020 and 2018,2019, respectively. Distributions per unit were $0.78375$0.7941 and $0.763125$0.7838 during the nine months ended September 30, 20192020 and 2018,2019, respectively.
During the nine months ended September 30, 2019 Sterling exchanged 1,475 common shares for 1,475 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $28. During the nine months ended September 30, 20182020 there were no0 limited partnership units exchanged for common shares pursuant to redemption requests.
25
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
At the sole and absolute discretion of the limited partnership, and so long as our redemption plans exist, and applicable holding periods are met,Limited Partners may request the operating partnership redeem their limited partnership units. The operating partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, (2) offer shares in lieu of cash for the redemption on a basis of one1 limited partnership unit for one Sterling common share (the “Exchange Request”). The Exchange Request shall be exercised pursuant to a Notice of Exchange. If the issuance of Sterling common shares pursuant to an Exchange Request will cause the shareholder to exceed the ownership limitations, among other reasons, payment will be made to the Limited Partner in cash. No Limited Partner may exercise an Exchange Request more than twice during any calendar year, and Exchange Requests may not be made for less than 1,000 limited partnership units. If a Limited Partner owns fewer than 1,000 limited partnership units, all of the limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.
NOTE 10 – 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 $35,000$40,000 worth of securities. Currently, the fixed redemption price is $18.00$18.25 per share or unit under the plans, which price became effective January 1, 2019.2020. Prior to January 1, 2020, the redemption price was $18.00 per share or unit under the plan.
We may redeem securities under the plans provided that the aggregate total has not been exceeded and we have sufficient funds to do so. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plans, either or both of them, if it determines to do so in its sole discretion.
During the nine months ended September 30, 2020 and 2019, the Trust redeemed 101,000 and 2018, the Company redeemed 33,000 and 63,000 common shares valued at $1,853 and $593, and $1,099.respectively. In addition, during the nine months ended September 30, 2020 and 2019, the Trust redeemed 52,000 and 2018, the Company redeemed 55,000 and 61,000 units valued at $933 and $980, and $1,068.respectively.
NOTE 11 – BENEFICIAL INTEREST
We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of September 30, 20192020 and December 31, 2018,2019, there were 9,320,0009,737,000 and 8,967,0009,436,000 common shares outstanding, respectively. We had no0 preferred shares outstanding as of either date.
29
For the three months ended STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 2018, the operating partnership declared dividends of $2,4352019 (UNAUDITED)
(Dollar amounts in thousands, except share and $2,248 respectively, to holders of commons shares which were paid on October 15, 2019 and 2018, respectively. per share data)
Dividends paid to holders of common shares were $0.78375$0.7941 per share and $0.763125$0.7838 per share for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and 2018,2019, the operating partnership declared dividends of $2,577 and $2,435 respectively, to holders of common shares which were paid on October 15, 2020 and 2019, respectively.
NOTE 12 – 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 June 25, 2020 our Board of Trustees approved of an additional 2,000,000 common shares to be issued under the dividend reinvestment plan. We plan to file a Form S-3D registration statement to register the additional shares with the Securities and Exchange Commission in the near future.
26
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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 $19.00$19.25 and $18.50$19.00 at September 30, 20192020 and December 31, 2018,2019, respectively. See discussion of determination of estimated value in Note 16.
Therefore, the purchase price per common share for dividend reinvestments was $18.05$18.29 and $17.58$18.05 and for additional optional cash purchases was $19.00$19.25 and $18.50$19.00 at September 30, 20192020 and December 31, 2018,2019, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten-day notice to participants.
In the nine months ended September 30, 2020, 265,000 shares were issued pursuant to dividend reinvestments and 134,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $4,836 and $2,579 respectively.
In the nine months ended September 30, 2019, 255,000 shares were issued pursuant to dividend reinvestments and 127,000 shares were issued pursuant to additional optional cash purchases under the plan. In the nine months ended September 30, 2018, 243,000 shares were issued pursuant to dividend reinvestmentsplan, valued at $4,591 and 166,000 shares were issued pursuant to additional optional cash purchases under the plan.$2,411 respectively.
NOTE 13 – RELATED PARTY TRANSACTIONS
Property Management Fees
During the nine months ended September 30, 20192020 and 2018,2019, we paid property management fees and administrative fees to GOLDMARK Property Management, in an amount equal to 5% of rents of the properties managed by GOLDMARK.Inc. GOLDMARK Property Management is owned in part by Kenneth Regan, James Wieland and Joel Thomsen. For the nine months ended September 30, 20192020 and 2018,2019, we paid management fees, on-site staff costs and other miscellaneous fees required to run the property of $9,530$9,518 and $8,934,$9,530, respectively, to GOLDMARK Property Management.Management, Inc. Management fees paid during the nine months ended September 30, 2020 and 2019, approximated 5% of net collected rents. In addition, during the nine months ended September 30, 20192020 and 2018, 2019,
30
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
we paid repair and maintenance related payroll and payroll related expenses to GOLDMARK Property Management totaling $4,664$4,849 and $3,921,$4,664, respectively.
Board of Trustee Fees
We incurred Trustee fees of $44$49 and $53$44 during the nine months ended September 30, 20192020 and 2018,2019, respectively. As of September 30, 2019,2020, and December 31, 20182019 we owed our Trustees $15$14 and $34$29 for unpaid board of trustee fees, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees specific amounts for meetings attended.
27
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The plan provides:
| | | |
| | ||
Board Chairman – Board Meeting | | 105 shares/meeting | |
Trustee – Board Meeting | | | 75 shares/meeting |
Committee Chair – Committee Meeting | | | 30 shares/meeting |
Trustee – Committee Meeting | | | 30 shares/meeting |
Common shares earned in accordance with the plan are calculated on an annual basis. Shares earned pursuant to the Trustee Compensation Plan are issued on or about July 15 for Trustees’ prior year of service. Non-independent Trustees are not compensated for their service on the Board or Committees.
Advisory Agreement
We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no0 paid employees. The following is a brief description of the current fees and compensation that may be received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 28, 2019,26, 2020, effective until March 31, 2020. The Board of Trustees approved amendment number one to the eighth amended and restated Advisory Agreement on September 19, 2019.2021.
Management Fee: 0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.
During the nine months ended September 30, 20192020 and 2018,2019, we incurred advisory management fees of $2,244$2,321 and $2,167$2,244 with Sterling Management, LLC, our Advisor. As of September 30, 20192020 and December 31, 2018,2019, we owed our Advisor $250$262 and $242,$503, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations. During the nine months ended September 30, 20192020 and 2018,2019, we reimbursed the Advisor for operating costs totaling $22 and $23,each period, respectively. There were no unpaid reimbursable operating costs owed to our Advisor asAs of September 30, 2019 or December 31, 2018.2020, we owed our Advisor $11 for unpaid operating costs.
Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by a majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.
31
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
During the nine months ended September 30, 2020, we incurred acquisition fees of $500. During the nine months ended September 30, 2019 there were no0 acquisition fees incurred with our Advisor. During the nine months ended September 30, 2018 we incurred acquisition fees of $205 with our Advisor.See Note 16. There were no0 acquisition fees owed to our Advisor as of September 30, 2019. As of2020 or December 31, 2018, we owed our Advisor $32 for unpaid acquisition fees. 2019.
Disposition Fee: For its services in the effort to sell any investment for us, the Advisor receives a disposition fee of 2.5% of the sales price of each property disposition, capped at $375 per disposition.
28
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the nine months ended September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
2020, we incurred disposition fees of $143. During the nine months ended September 30, 2019, there were no0 disposition fees incurred with our Advisor. During the nine months ended September 30, 2018, we incurred $130 in disposition fees with our Advisor. See Note 15. There were no0 disposition fees owed to our Advisor as of September 30, 20192020 or December 31, 2018.2019.
Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility. The finance fee shall be capped at $38 per loan, refinance, line of credit or other credit facility.
During the nine months ended September 30, 2020 we incurred financing fees of $82 with our Advisor. During the nine months ended September 30, 2019, there were no0 financing fees incurred with our Advisor for loan financing and refinancing activities. During the nine months endedAdvisor. As of September 30, 2018,2020, we incurred financingowed the advisor $2 for finance fees of $61 with our Advisor.incurred. There were no0 financing fees owed to our Advisor as of September 30, 2019. As of December 31, 2018, we owed our Advisor $8 for unpaid financing fees. 2019.
Project Management Fee: 6% of all completed capital improvement projects on the Real Propertyreal estate investments owned by the Trust are paid to the Advisor.
During the three and nine months ended September 30, 2019,2020, there were $3$226 in project management fees incurred with our Advisor for capital improvement projects. As of September 30, 20192020 we owed our Advisor $3$22 for unpaid project management fees.
Development Fee: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.
| | | | | | | |
Total Cost | | Fee | | Range of Fee | | Formula | |
0 – 10M | | 5.0 | % | | 0 –.5M | | 0M – 5.0% x (TC – 0M) |
10M - 20M | | 4.5 | % | | .5 M – .95M | | .50M – 4.5% x (TC – 10M) |
20M – 30M | | 4.0 | % | | .95 M – 1.35M | | .95M – 4.0% x (TC – 20M) |
30M – 40M | | 3.5 | % | | 1.35 M – 1.70M | | 1.35M – 3.5% x (TC – 30M) |
40M – 50M | | 3.0 | % | | 1.70 M – 2.00M | | 1.70M – 3.0% x (TC – 40M) |
TC = Total Project Cost
During the nine months ended September 30, 2020 we incurred development fees of $715 with our Advisor. During the nine months ended September 30, 2019, and 2018, there were no0 development fees incurred with our Advisor. During the nine months ended September 30, 2020, our Advisor decided to forgo the $104 portion of held back development fees related to the Stonefield development project which was recognized as a reduction in building and improvements. As of both September 30, 2019, and2020, there was $794 of development fees owed to our Advisor of which $79 is due to the 10% hold back with respect to the Glen Pond development project. As of December 31, 2018,2019, we owed our Advisor a total of $104 for unpaid development fees, of which the entire amount was for unpaid development fees as part of a 10% hold back with respect to the Stonefield development project, respectively.project.
32
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Operating Partnership Units Issued in Connection with Acquisitions
During the nine months ended September 30, 2019, there were no operating partnership units issued directly or indirectly, to affiliated entities.
During the nine months ended September 30, 2018,2020, we issued directly or indirectly 42,000176,000 operating partnership units to entitiesan entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $773.$3,373.
29
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Commissions
During the nine months ended September 30, 2019, there were no commissions incurred with a related party.0 operating partnership units issued directly or indirectly, to affiliated entities.
Commissions
During the nine months ended September 30, 2018,2020, we incurred real estate commissions of $21 owed$583, to GOLDMARK Commercial Real Estate Services, Inc. (f/k/a GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc. ), which is controlled by Messrs. Regan and Wieland. ThereDuring the nine months ended September 30, 2019, there were no outstanding0 commissions owed asincurred with GOLDMARK Commercial Real Estate Services, Inc.. As of September 30, 2019 or2020, we owed $250 in commissions to GOLDMARK Commercial Real Estate Services, Inc. As of December 31, 2018.2019, there were 0 unpaid commissions to GOLDMARK Commercial Real Estate Services, Inc.
Rental Income
During the nine months ended September 30, 2020, we incurred real estate commissions of $308, to GOLDMARK Property Management, which is controlled by Messrs. Regan, Wieland and Thomsen. During the nine months ended September 30, 2019, there were 0 commissions incurred with GOLDMARK Property Management. As of September 30, 2020, we owed $308 in commissions to GOLDMARK Property Management. As of December 31, 2019, there were 0 unpaid commissions to GOLDMARK Property Management.
Rental Income
During the nine months ended September 30, 2020 and 2018,2019, we received rental income of $42$63 and $37,$42, respectively, under an operating lease agreement with our Advisor.
During the nine months ended September 30, 20192020 and 2018,2019, we received rental income of $42$43 and $41,$42, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.
During the nine months ended September 30, 20192020 and 2018,2019, we received rental income of $173$202 and $172,$173, respectively, under operating lease agreements with GOLDMARK Property Management.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Environmental Matters
Federal law (and the laws of some states in which we own or may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property.
There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.
33
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Risk of Uninsured Property Losses
We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.
Litigation
The CompanyTrust is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Company.Trust.
Significant Risks and Uncertainties
The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. A number of uncertainties continue to exist at this time, including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the recent surge in COVID-19 cases in many states. The Trust did not incur significant disruptions during the nine months ended September 30, 2020 from the COVID-19 pandemic. During the quarter ended September 30, 2020, the Trust continued to monitor state and federal legislative actions and efforts in regards to the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen a number of tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that the COVID-19 pandemic and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.
During the quarter ended September 30, 2020, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.
NOTE 15 – DISPOSITIONS
During the nine months ended September 30, 2020, the operating partnership sold 2 properties. We sold a retail property located in Apple Valley, Minnesota, for $3,670 and recognized a gain of $1,455 in March 2020. We sold an office property located in St. Cloud, Minnesota, for $2,050 and recognized a gain of $1 in May 2020. During the nine months ended September 30, 2019, the operating partnership did not dispose of any properties.
3034
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20192020 and 20182019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 15 – DISPOSITIONS
During the nine months ended September 30, 2019, the operating partnership did not dispose of any properties. During the nine months ended September 30, 2018, the operating partnership sold three properties. We sold an industrial property located in Redwood Falls, Minnesota for $5,200 and recognized a gain of $935 in April 2018. We sold a retail property located in Austin, Texas for $3,615 and recognized a gain of $1,266 in July 2018. We sold one of two buildings included in an office property located in Bismarck, North Dakota for $4,250 and recognized a gain of $1,514 in July 2018.
NOTE 16 – ACQUISITIONS
The Company had no acquisitions during the nine months ended September 30, 2019. The CompanyTrust closed on the following acquisitions during the nine months ended September 30, 2018:2020.
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Date |
| Property Name |
| Location |
| Property Type |
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| Units/ Square Footage/ Acres |
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| Acquisition Price |
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3/1/18 |
| Thunder Creek Apartments |
| Fargo, ND |
| Apartment complex |
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| 57 units |
| $ | 4,460 | (a) |
9/1/18 |
| Chandler 1834 |
| Grand Forks, ND |
| Apartment complex |
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| 12 units |
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| 630 |
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9/17/18 |
| Dairy Queen (b) |
| Apple Valley, MN |
| Retail building |
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| 5,348 sq. ft. |
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| 3,000 |
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| $ | 8,090 | (b) |
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Date | | Property Name | | Location | | Property Type | | | Units/ Square Footage/ Acres | | | Acquisition Price |
| | | | | | | | | | | | |
1/12/20 | | Wolf Creek | | Fargo, ND | | Apartment complex | | | 54 units | | $ | 4,968 |
1/31/20 | | Columbia Park Village | | Grand Forks, ND | | Apartment complex | | | 12 units | | | 612 |
3/1/20 | | Belmont East & West | | Bismarck, ND | | Apartment complex | | | 26 units | | | 1,494 |
3/1/20 | | Eastbrook | | Bismarck, ND | | Apartment complex | | | 24 units | | | 1,296 |
3/1/20 | | Hawn | | Fargo, ND | | Apartment complex | | | 48 units | | | 2,400 |
3/1/20 | | Rosser | | Bismarck, ND | | Apartment complex | | | 24 units | | | 1,296 |
8/28/20 | | Cargill Building (a) | | Fargo, ND | | Office building | | | 45,755 sq. ft. | | | 6,500 |
9/15/20 | | Foxtail Townhomes | | Fargo, ND | | Apartment complex | | | 30 units | | | 1,450 |
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| | | | | | | | | | | $ | 20,016 |
| | | | | | | | | | | | (b) |
(a) |
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(b) | Acquisition price does not include capitalized closing costs and adjustments totaling $842, special assessments assumed and capitalized of |
Total consideration given for acquisitions through September 30, 20182020 was completed through issuing approximately 118,000469,000 limited partnership units of the operating partnership valued at $18.50$19.25 per unit for an aggregate consideration of approximately $2,176,$9,031, assumed liabilities of $538, a mortgage of $3,225, 1031 tax-deferred exchange funds of $3,004, assumed liabilities of $71$5,658 and cash of $3,075.$2,739. 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 Trust had 0 acquisitions during the nine months ended September 30, 2019.
The following table summarizes the acquisition date fair values, before prorations, the CompanyTrust recorded in conjunction with the acquisitions discussed above:
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| Nine Months Ended |
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| September 30, |
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| 2019 |
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| 2018 |
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| Land, building, tenant improvements and FF&E |
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| $ | - |
| $ | 8,326 |
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| Other liabilities |
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| - |
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| (71) |
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| Net assets acquired |
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| - |
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| 8,255 |
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| Equity/limited partnership unit consideration |
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| - |
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| (2,176) |
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| Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange |
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| - |
| (3,004) |
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| Net cash consideration |
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| $ | - |
| $ | 3,075 |
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| | | | Nine Months Ended | ||||
| | | | September 30, | ||||
| | | | | 2020 | | | 2019 |
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Land, building, tenant improvements and FF&E | | | | $ | 21,191 | | $ | - |
Other liabilities | | | | | (538) | | | - |
Net assets acquired | | | | | 20,653 | | | - |
Equity/limited partnership unit consideration | | | | | (9,031) | | | - |
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange | | (5,658) | | - | ||||
New loans | | | | | (3,225) | | | - |
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Net cash consideration | | | | $ | 2,739 | | $ | - |
Estimated Value of Units/Shares
The Board of Trustees determined an estimate of fair value for the trust shares in the first nine months of 20192020 and 2018.2019. In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair
31
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
value for the limited partnership units in the first nine months of 20192020 and 2018.2019. 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
35
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition.
The Board determined the fair value of the shares and limited partnership units to be $18.50$19.25 per share/unit effective January 1, 2018.2020. The Board determined the fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019.
Determination of price is a matter within the Board’s sole discretion. The Trust does not determine price based on any rote formula or specific factors. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor.
As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments or opinions that may, or may not, prove to be correct. The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units. In addition, the Board’s estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.
Furthermore, in reaching an estimate of the value of the shares and limited partnership units, the Board applied a liquidity discount to one valuation scenario in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange and did not consider: a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third party or the costs that are likely to be incurred in connection with an appropriate exit strategy, whether that strategy might be a listing of the limited partnership units or common shares on a national securities exchange or a merger or sale of our portfolio.
NOTE 17 - SUBSEQUENT EVENTS
On October 5, 2020, the Trust purchased 60% of a 146,000 SF vacant lot in Rogers, Minnesota as tenants in common with an unrelated third party for a total purchase price of $1,100.
On October 15, 2019,2020, we paid a dividend or distribution of $0.26125$0.26469 per share on our common shares of beneficial interest or limited partnership units, respectively, to common shareholders and limited partnership unit holders of record on September 30, 2019.2020.
On October 2, 2019, we entered into an interest rate swap in the notional amount of $7,200 to provide a fixed rate of 3.15% that matures November 1, 2029. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it will be recorded at fair value and changes in fair value are recorded to accumulated comprehensive income.
On November 1, 2019, the operating partnership decided to self-insure 50% of the primary layer of their insurance policy, as a result the operating partnership believes it is reasonably possible that we could be required to pay between $0 and $860.
32
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019 and 2018 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
On November 8, 2019, the operating partnership purchased land in a 60% owned joint venture (“SE Maple Grove”) that intends to develop a 160 unit multifamily property. SE Maple Grove holds land located in Maple Grove, Minnesota, and has total assets of $3,455, and no mortgage payable.
Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.
We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.
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All dollar amounts in this Form 10-Q in Part I ItemsItem 2. through Item 4 and Part II ItemsItem 2. are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our business and growth strategies; (iii) the real estate industry; (iv) our financing plans; and (v) other risks detailed in the Company’s periodic reports filed with the Securities and Exchange Commission. The words “believe”, “expect”, “anticipate”, “may”, “plan”, “should”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.
Overview
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 173179 properties containing 9,85210,184 apartment units and approximately 1,662,0001,692,000 square feet of leasable commercial space as of September 30, 2019. 2020. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $682,862, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties
We operate as an Umbrella Partnership Real Estate Investment Trust (UPREIT), which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we hold all or substantially all of our assets through our operating partnership. We control the operating partnership as the sole general partner and own approximately 34.34%34.82% of the operating partnership as of September 30, 2019.2020. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, our proportionate shares of the assets and income of our operating partnership are deemed to be assets and income of the trust.
We use this UPREIT structure to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the property with one of its operating partnerships in exchange for limited partnership units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, we may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in our operating partnership, rather than directly in Sterling, may be more attractive to certain institutional or other investors due to their business or tax structure. If an investor is interested in making a substantial investment in our operating partnership, our structure provides us the flexibility to accommodate different terms for each investment, while applicable tax laws generally restrict a REIT from charging different fee rates among its shareholders. Finally, if our shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.
Operating Partnership
Our operating partnership, Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership in April 2003 to acquire, own and operate properties on our behalf. The operating partnership holds a diversified portfolio of multifamily and commercial properties located principally in the upper and central Midwest United States.
3437
As of September 30, 2019,2020, approximately 73.3%73.7% of our properties were apartment communities located primarily in North Dakota with others located in Minnesota, Missouri and Nebraska. Most multifamily properties are leased to a variety of tenants under short‑termshort-term leases.
As of September 30, 2019,2020, approximately 26.7%26.3% of our properties were comprised of office, retail, industrial, restaurant and medical commercial property located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. We have both single and multi-tenant properties in the commercial portfolio, most of which are under long-term leases.
Our real estate portfolio consisted of 173 properties containing 9,852 apartment units and approximately 1,662,000 square feet of leasable commercial space as of September 30, 2019. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $654,747, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.
Our Board of Trustees and Executive Officers
We operate under the direction of our Board of Trustees, the members of which are accountable to us and our shareholders. Our trustees are elected annually by our shareholders. In addition, the Board has a duty to supervise our relationship with the Advisor and evaluates the performance of and fees 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 28, 2019,26, 2020, effective April 1, 2019 until March 31, 2020.2021. Our Board of Trustees has provided investment guidance for the Advisor to follow, and must approve each investment recommended by the Advisor. Currently, we have nineeight members on our board, sevensix of whom are independent.
Our Advisor
Our external Advisor is Sterling Management, LLC, a North Dakota limited liability company formed in November 2002. Our Advisor, with an officeheadquarters in Fargo, North Dakota, is responsible for managing our day-to-day affairs, capital projects and for identifying, acquiring and disposing investments on our behalf. From 2007 to 2020, our Advisor’s staff increased in number and expertise, growing from four to 28 full-time employees.
In September 2019, Sterling Management, LLC onboarded a projects management department that consisted of nine new employees. This team is responsible for overseeing and managing all capital projects that are being completed on the portfolio’s 173 properties, oversite and management, that was previously being completed by our third party property managers. We expect the internal management of capital projects will allow for efficiencies in how capital projects are managed as well as provide better transparency operationally between all departments of Sterling Management. In addition, the services will allow Sterling Management to provide a complete asset management service to the properties. Prior to onboarding, the Trust paid a project management fee to the third party property managers. Commencing September 1, 2019, the project management fee calculated on projects will be paid to Sterling Management, LLC.
Critical Accounting Estimates
Preparation of our financial statements requires estimates and judgments to be made that effect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.
There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the nine months ended September 30, 20192020 included elsewhere in this report.
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Specific Achievements
| Increased revenues from rental operations by |
| ● | Increased revenues from rental operations by $1,318 or 1.5% for the nine months ended September 30, |
| Acquired seven residential properties and one commercial property during the nine months ended September 30, 2020. |
● | Disposed of two commercial properties during the nine months ended September 30, 2020. |
| ● | Declared dividends aggregating |
Results of Operations for the Three Months Ended September 30, 20192020 and 20182019
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
|
| Three months ended September 30, 2020 |
| Three months ended September 30, 2019 | ||||||||||||||||||||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Three months ended September 30, 2019 |
| Three months ended September 30, 2018 | ||||||||||||||||||||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||||||||||||||||||||
|
| (unaudited) |
| (unaudited) | ||||||||||||||||||||||||||||||||
|
| (in thousands) |
| (in thousands) | ||||||||||||||||||||||||||||||||
| | (unaudited) | | (unaudited) | ||||||||||||||||||||||||||||||||
|
| (in thousands) | | (in thousands) | ||||||||||||||||||||||||||||||||
Real Estate Revenues |
| $ | 23,662 |
| $ | 6,511 |
| $ | 30,173 |
| $ | 22,439 |
| $ | 6,616 |
| $ | 29,055 |
| $ | 24,858 |
| $ | 6,008 |
| $ | 30,866 |
| $ | 23,662 |
| $ | 6,511 | | $ | 30,173 |
Real Estate Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Real Estate Taxes |
|
| 2,343 |
|
| 693 |
|
| 3,036 |
|
| 2,194 |
|
| 695 |
|
| 2,889 | | | 2,486 | | | 674 | | | 3,160 | | | 2,343 | | | 693 | | | 3,036 |
Property Management |
|
| 3,220 |
|
| 258 |
|
| 3,478 |
|
| 2,922 |
|
| 240 |
|
| 3,162 | | | 3,100 | | | 203 | | | 3,303 | | | 3,220 | | | 258 | | | 3,478 |
Utilities |
|
| 1,708 |
|
| 309 |
|
| 2,017 |
|
| 1,578 |
|
| 382 |
|
| 1,960 | | | 1,776 | | | 287 | | | 2,063 | | | 1,708 | | | 309 | | | 2,017 |
Repairs and Maintenance |
|
| 5,795 |
|
| 531 |
|
| 6,326 |
|
| 4,987 |
|
| 612 |
|
| 5,599 | | | 5,351 | | | 596 | | | 5,947 | | | 5,795 | | | 531 | | | 6,326 |
Insurance |
|
| 504 |
|
| 19 |
|
| 523 |
|
| 566 |
|
| 24 |
|
| 590 | | | 793 | | | 36 | | | 829 | | | 504 | | | 19 | | | 523 |
Total Real Estate Expenses |
|
| 13,570 |
|
| 1,810 |
|
| 15,380 |
|
| 12,247 |
|
| 1,953 |
|
| 14,200 | | | 13,506 | | | 1,796 | | | 15,302 | | | 13,570 | | | 1,810 | | | 15,380 |
Net Operating Income |
| $ | 10,092 |
| $ | 4,701 |
|
| 14,793 |
| $ | 10,192 |
| $ | 4,663 |
|
| 14,855 | | $ | 11,352 | | $ | 4,212 | | | 15,564 | | $ | 10,092 | | $ | 4,701 | | | 14,793 |
Interest |
|
|
|
|
|
|
|
| 4,521 |
|
|
|
|
|
|
|
| 4,557 | | | | | | | | | 4,187 | | | | | | | | | 4,521 |
Depreciation and amortization |
|
|
|
|
|
|
|
| 5,322 |
|
|
|
|
|
|
|
| 5,274 | | | | | | | | | 5,328 | | | | | | | | | 5,322 |
Administration of REIT |
|
|
|
|
|
|
|
| 969 |
|
|
|
|
|
|
|
| 1,460 | | | | | | | | | 972 | | | | | | | | | 969 |
Other (income)/expense |
|
|
|
|
|
|
|
| 511 |
|
|
|
|
|
|
|
| (3,520) | | | | | | | | | (189) | | | | | | | | | 511 |
Net Income |
|
|
|
|
|
|
| $ | 3,470 |
|
|
|
|
|
|
| $ | 7,084 | | | | | | | | $ | 5,266 | | | | | | | | $ | 3,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Net Income Attributed to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Noncontrolling Interest |
|
|
|
|
|
|
| $ | 2,257 |
|
|
|
|
|
|
| $ | 4,705 | | | | | | | | $ | 3,422 | | | | | | | | $ | 2,257 |
Sterling Real Estate Trust |
|
|
|
|
|
|
| $ | 1,213 |
|
|
|
|
|
|
| $ | 2,379 | | | | | | | | $ | 1,844 | | | | | | | | $ | 1,213 |
Dividends per share (1) |
|
|
|
|
|
|
| $ | 0.2613 |
|
|
|
|
|
|
| $ | 0.2544 | | | | | | | | $ | 0.2647 | | | | | | | | $ | 0.2613 |
Earnings per share |
|
|
|
|
|
|
| $ | 0.13 |
|
|
|
|
|
|
| $ | 0.27 | | | | | | | | $ | 0.19 | | | | | | | | $ | 0.13 |
Weighted average number of common shares |
|
|
|
|
|
|
|
| 9,322 |
|
|
|
|
|
|
|
| 8,840 | | | | | | | | | 9,740 | | | | | | | | | 9,322 |
| (1) |
| Does not take into consideration the amounts distributed by the operating partnership to limited partners. |
Revenues
Property revenues of $30,173$30,866 for the three months ended September 30, 20192020 increased $1,118$693 or 3.8%2.3% in comparison to the same period in 2018.2019. Residential property revenues increased $1,223$1,196 and commercial property revenues decreased $105.$503.
The following table illustrates changes in occupancy percentages for the three month periods indicated:
| | | | | |
|
| September 30, | | September 30, | |
|
| 2020 | | 2019 | |
Residential occupancy | | 93.2 | % | 93.9 | % |
|
|
|
|
|
|
|
| September 30, |
| September 30, |
|
|
| 2019 |
| 2018 |
|
Residential occupancy |
| 93.9 | % | 93.0 | % |
39
Residential revenues for the three months ended September 30, 20192020 increased $1,223$1,196 or 5.1% in comparison to the same period for 2018.2019. Residential properties acquired since January 1, 20182020 contributed approximately $784$644 to the increase in
36
total residential revenues in the three months ended September 30, 2019. Rental2020. The remaining increase is due to decreased rental incentives due to increased renewals, increased rent charges at our stabilized properties as well as the increased income fromrelated to Ratio Utility Billing System (RUBS) Income in our Minneapolis, Minnesota market. The overall residential properties ownedincome increase was offset by increased vacancy, primarily in our Minneapolis, Minnesota market. Residential revenues comprised 80.5% of total revenues for more than one year increased approximately $251 in comparison to the three months ended September 30, 2018. Residential revenues comprised2020 compared to 78.4% of total revenues for the three months ended September 30, 2019 compared to 77.2% of total revenues for the three months ended September 30, 2018.2019. The vacancy increase, coincides with a decrease in residential occupancy rates for the three months ended September 30, 2019 increased 0.83% primarily due to marketing strategies to increase unit rentals, as well as acquisitions occurring in late 2018.2020 of 0.70%.
For the three months ended September 30, 20192020, total commercial revenues decreased $105$503 or 7.7% in comparison to the same period for 2018.2019. Vacant office space in commercial properties located in the Fargo, North Dakota region constituted $217 of the decreased revenues. As of September 30, 2020, these properties are considered fully leased through an executed 12 year lease. In addition, disposition of two commercial properties, account for $141 in decreased revenues during the three months ended September 30, 2020. The remaining decrease was attributedrelates to the salesamortization of an industrial propertystraight line rents at a commercial office building in Redwood Falls,our Minneapolis, Minnesota and a retail property in Austin, Texas,market as well as recognizing rental incentives on an office property locatedoverall decreased estimated common area maintenance income for the three months ended September 30, 2020 as compared to the same period in Fargo, North Dakota.2019. Commercial revenues comprised 21.6%19.5% of the total revenues for the three months ended September 30, 20192020 compared to 22.8%21.6% of total revenues for the three months ended September 30, 2018.2019.
Expenses
Residential expenses from operations of $13,570$13,506 during the three months ended September 30, 2019 increased $1,3232020 decreased $64 or 10.8%0.5% in comparison to the same period in 2018.2019. Though the net decrease is relatively comparable to the same period in 2019, expenses as shown in the above table vary significantly by category as compared to the same period in 2019. The increase wasnet decrease is attributed to an increaseddecreased repairs and maintenance expense of $808$444 or 16.2% as well as7.7%, offset by increased real estate taxes of $149$142 or 6.79%6.1%, and property insurance expense of $289 or 57.3%. Actual property management fees remained unchanged and continue to approximate 5% of net collected rents; however, other property management related expenses have increased slightly due to increased competition for labor.
Commercial expenses from operations of $1,810also decreased during the three months ended September 30, 20192020. As noted above, the primary driver of decreased $143operational expenses, is specifically related to reduced repairs and maintenance expense. This is due to COVID-19 causing residential lease renewals to increase as residents chose to remain in their current apartment units, precluding general maintenance and unit upgrades to be performed. The Trust believes a portion of the decrease in repairs and maintenance is deferred and will be realized as the COVID-19 pandemic passes and the units will become available to be upgraded.
Commercial expenses from operations of $1,796 during the three months ended September 30, 2020 decreased $14 or 7.3%0.8% in comparison to the same period in 2018.2019. The net decrease wasin overall expenses is attributed to COVID-19, causing shelter-in-place orders in many locations where our office space is located, resulting in decreased property management expenses of $55 or 21.4% and decreased utility costs of $22 or 7.1%. Furthermore, repairs and maintenance costs, relatedexpense for the three months ended September 30, 2020 increased $65 or 12.2%, offsetting the above decreases. A primary factor for reported increased repairs and maintenance expense, is due to increased2019 direct tenant billbacks of $119$120, offsetting repairs and maintenance expense for the period then ended. Repairs and maintenance expense decreased $55 when focusing specifically on expenses incurred related to business operations.
Interest expense of $4,187 during the three months ended September 30, 2020 decreased $334 or 100%. Direct tenant billbacks7.4% in comparison to the same period in 2019. Payoffs of higher interest rate loans during the first quarter of 2020 and fourth quarter of 2019 as well as new debt and refinancing during 2020, decreased the overall weighted average interest rate on our outstanding mortgage debt. The lower mortgage rate decreased total interest paid on mortgages by $172 during the three months ended September 30, 2020 as compared to the same period in 2019, leading to mortgage interest expense as a percent of income of 13.65% in 2020 versus 14.53% in 2019. Additionally, interest expense on construction in progress, also contributed to the decrease in interest expense as compared to the same period in 2019. Interest expense for construction in progress is classified as a contra-expense account, offsetting repairs and maintenance expenses.
Interestinterest expense of $4,521by $165 during the three months ended September 30, 2019 decreased $362020.
40
Depreciation and amortization expense of $5,328 during the three months ended September 30, 2020 increased $6 or 0.79%0.1% in comparison to the same period in 2018. Interest expense was approximately 15.0% and 15.7% of rental income for the three months ended September 30, 2019 and 2018, respectively.
Depreciation and amortization expense of $5,322 during the three months ended September 30, 2019 increased $48 or 0.9% in comparison to the same period in 2018. The increase is primarily due to normal increases in monthly amortization expense.2019. 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 three months ended September 30, 2020 and 2019 was 17.26% and 17.64%, respectively.
REIT administration expenses of $969$972 during the three months ended September 30, 2020 increased $3 or 0.3% in comparison to the same period in 2019, showing administrative expenses remaining consistent as compared to the same period in 2019.
Other income of $189 during the three months ended September 30, 2020 increased $700 or 136.99% in comparison to the same period in 2019. The primary reason for the increase was that the future economic benefit of a portion of a commercial property in Fargo, North Dakota was determined to be non-recoverable. As such, during the three months ended September 30, 2019, decreased $491 or 33.63% in comparisonwe also experienced a loss on involuntary conversion of $816 due to the same period in 2018, due to disposition feespartial demolition of that property. There is no such loss recorded in 2018. As of December 31, 2018, all disposition fees are netted with gain or loss on sale of real estate investments. for the three months ended September 30, 2020.
Net Operating Income
We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included above for more information on NOI performance by segment.
Net Income
Net income for the three months ended September 30, 20192020 was $3,470$5,266 compared to $7,084$3,470 for the three months ended September 30, 2018. The decrease2019. As noted in Net Income is primarily attributed to disposition activity inabove, the prior
37
period that did not occur in the current period. Duringincreased net income for the three months ended September 30, 2018, we recognized a gain2020 is attributed to eight property acquisitions occurring in 2020, as well as the impact the COVID-19 pandemic has had on salethe operational expenses of two commercial real estate investmentsthe portfolio.
41
Results of Operations for the Nine Months Ended September 30, 20192020
| | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 |
| Nine months ended September 30, 2019 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
| | (unaudited) | | (unaudited) | ||||||||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Real Estate Revenues |
| $ | 73,234 |
| $ | 18,359 |
| $ | 91,593 |
| $ | 70,920 |
| $ | 19,355 |
| $ | 90,275 |
Real Estate Expenses | | | | | | | | | | | | | | | | | | |
Real Estate Taxes | | | 7,433 | | | 2,030 | | | 9,463 | | | 7,001 | | | 2,083 | | | 9,084 |
Property Management | | | 9,495 | | | 666 | | | 10,161 | | | 9,504 | | | 752 | | | 10,256 |
Utilities | | | 6,098 | | | 810 | | | 6,908 | | | 6,246 | | | 897 | | | 7,143 |
Repairs and Maintenance | | | 14,572 | | | 1,508 | | | 16,080 | | | 15,557 | | | 1,694 | | | 17,251 |
Insurance | | | 2,380 | | | 110 | | | 2,490 | | | 1,646 | | | 59 | | | 1,705 |
Total Real Estate Expenses | | | 39,978 | | | 5,124 | | | 45,102 | | | 39,954 | | | 5,485 | | | 45,439 |
Net Operating Income | | $ | 33,256 | | $ | 13,235 | | | 46,491 | | $ | 30,966 | | $ | 13,870 | | | 44,836 |
Interest | | | | | | | | | 12,761 | | | | | | | | | 13,819 |
Depreciation and amortization | | | | | | | | | 15,826 | | | | | | | | | 16,213 |
Administration of REIT | | | | | | | | | 3,218 | | | | | | | | | 3,051 |
Other (income)/expense | | | | | | | | | (2,204) | | | | | | | | | (328) |
Net Income | | | | | | | | $ | 16,890 | | | | | | | | $ | 12,081 |
| | | | | | | | | | | | | | | | | | |
Net Income Attributed to: | | | | | | | | | | | | | | | | | | |
Noncontrolling Interest | | | | | | | | $ | 11,031 | | | | | | | | $ | 7,933 |
Sterling Real Estate Trust | | | | | | | | $ | 5,859 | | | | | | | | $ | 4,148 |
Dividends per share (1) | | | | | | | | $ | 0.7941 | | | | | | | | $ | 0.7838 |
Earnings per share | | | | | | | | $ | 0.6100 | | | | | | | | $ | 0.4500 |
Weighted average number of common shares | | | | | | | | | 9,638 | | | | | | | | | 9,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2019 |
| Nine months ended September 30, 2018 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
|
| (unaudited) |
| (unaudited) | ||||||||||||||
|
| (in thousands) |
| (in thousands) | ||||||||||||||
Real Estate Revenues |
| $ | 70,920 |
| $ | 19,355 |
| $ | 90,275 |
| $ | 66,683 |
| $ | 20,119 |
| $ | 86,802 |
Real Estate Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Taxes |
|
| 7,001 |
|
| 2,083 |
|
| 9,084 |
|
| 6,568 |
|
| 2,065 |
|
| 8,633 |
Property Management |
|
| 9,504 |
|
| 752 |
|
| 10,256 |
|
| 8,895 |
|
| 676 |
|
| 9,571 |
Utilities |
|
| 6,246 |
|
| 897 |
|
| 7,143 |
|
| 5,847 |
|
| 1,118 |
|
| 6,965 |
Repairs and Maintenance |
|
| 15,557 |
|
| 1,694 |
|
| 17,251 |
|
| 14,159 |
|
| 1,634 |
|
| 15,793 |
Insurance |
|
| 1,646 |
|
| 59 |
|
| 1,705 |
|
| 1,624 |
|
| 69 |
|
| 1,693 |
Total Real Estate Expenses |
|
| 39,954 |
|
| 5,485 |
|
| 45,439 |
|
| 37,093 |
|
| 5,562 |
|
| 42,655 |
Net Operating Income |
| $ | 30,966 |
| $ | 13,870 |
|
| 44,836 |
| $ | 29,590 |
| $ | 14,557 |
|
| 44,147 |
Interest |
|
|
|
|
|
|
|
| 13,819 |
|
|
|
|
|
|
|
| 13,632 |
Depreciation and amortization |
|
|
|
|
|
|
|
| 16,213 |
|
|
|
|
|
|
|
| 15,907 |
Administration of REIT |
|
|
|
|
|
|
|
| 3,051 |
|
|
|
|
|
|
|
| 3,703 |
Other (income)/expense |
|
|
|
|
|
|
|
| (328) |
|
|
|
|
|
|
|
| (6,416) |
Net Income |
|
|
|
|
|
|
| $ | 12,081 |
|
|
|
|
|
|
| $ | 17,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributed to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest |
|
|
|
|
|
|
| $ | 7,933 |
|
|
|
|
|
|
| $ | 11,524 |
Sterling Real Estate Trust |
|
|
|
|
|
|
| $ | 4,148 |
|
|
|
|
|
|
| $ | 5,797 |
Dividends per share (1) |
|
|
|
|
|
|
| $ | 0.7838 |
|
|
|
|
|
|
| $ | 0.7631 |
Earnings per share |
|
|
|
|
|
|
| $ | 0.4500 |
|
|
|
|
|
|
| $ | 0.6600 |
Weighted average number of common shares |
|
|
|
|
|
|
|
| 9,208 |
|
|
|
|
|
|
|
| 8,730 |
| (1) |
| Does not take into consideration the amounts distributed by the operating partnership to limited partners. |
Revenues
Property revenues of $90,275$91,593 for the nine months ended September 30, 20192020 increased $3,473$1,318 or 4.0%1.5% in comparison to the same period in 2018.2019. Residential property revenues increased $4,237$2,314 and commercial property revenues decreased $764, during$996, from the prior year’s comparable nine month period.
The following table illustrates changes in occupancy percentages for the nine month periods indicated:
|
|
|
|
|
| |||||
|
| September 30, |
| September 30, |
| |||||
|
| 2019 |
| 2018 |
| |||||
| | | | | | |||||
| | September 30, | | September 30, | | |||||
|
| 2020 | | 2019 | | |||||
Residential occupancy |
| 93.8 | % | 93.8 | % | | 93.1 | % | 93.8 | % |
Commercial occupancy |
| 91.8 | % | 92.7 | % | | 93.6 | % | 91.8 | % |
Residential revenues for the nine months ended September 30, 20192020 increased $4,237$2,314 or 3.3% in comparison to the same period for 2018.2019. Residential properties acquired since January 1, 20182020 contributed approximately $2,353$1,282 to the increase in total residential revenues in the nine months ended September 30, 2019.2020. The remaining increase is due to decreased rental incentives due to increased renewals, increased rent charges at our stabilized properties decreased vacancy, as well as the increased collection efforts on receivable balances
38
written off. Incomeincome related to Ratio Utility Billing System (RUBS) incomeIncome in our Minneapolis, market also contributed to the overall residential income increase.Minnesota market. Residential revenues comprised 80.0% of total revenues for the nine months ended September 30, 2020 compared to 78.6% of total revenues for the nine months ended September 30, 2019 compared to 76.8% of total revenues for the nine months ended September 30, 2018.2019. Residential occupancy year-over-year has remained comparable increasing .01%.decreased 0.7%, offsetting the residential revenue increase by $601 and is attributed to the increased vacancy, primarily in our Minneapolis, Minnesota market.
42
For the nine months ended September 30, 2019,2020, total commercial revenues decreased $764$996 or 5.1% in comparison to the same period for 2018.2019. The decrease was primarily attributable to the saledisposition of threetwo commercial properties which accounted for $255 of the decrease during the nine months ended September 30, 2020. Vacant office space in 2018, as well as rental incentives recordedcommercial properties located in 2019 for an office building inthe Fargo, North Dakota.Dakota region contributed $656 of the decreased revenues. As of September 30, 2020, these properties are considered fully leased through an executed 12 year lease. Commercial revenues comprised 21.4%20.0% of the total revenues for the nine months ended September 30, 20192020 compared to 23.2%21.4% of total revenues for the nine months ended September 30, 2018.2019. Commercial occupancy year-over-year has remained comparable decreasing .91%at approximately 89%. The decrease is primarily due to vacant office buildings located in both Waite Park, Minnesota and Fargo, North Dakota.
Expenses
Residential expenses from operations of $39,954$39,978 during the nine months ended September 30, 20192020 increased $2,861$24 or 7.7%0.1% in comparison to the same period in 2018. The2019. Though the net increase was primarilyis relatively comparable to the same period in 2019, expenses as shown in the above table vary significantly by category as compared to the same period in 2019. Increased insurance expense of $734 or 44.6% due to an increaseincreased habitational premium expense as well as increased real estate taxes, driven by increased estimates of projected 2020 real estate taxes, of $432 or 6.2%, contribute to the overall increase. This was offset by a decrease in repairs and maintenance expense of $1,398$985 or 9.87%. Real estate taxes and6.3% as well as decreased utilities expense increases also contributed to the increase. Real estate taxes increased due to acquisitions occurring in Q4 2018, while utilities expense increase can be attributed to utility rate increases and performing upgrades to residential units prior to re-leasing. In addition, we experienced increases in property management fees.of $148 or 2.4%. Actual property management fees remainremained unchanged and continue to approximate 5% of net collected rents; however, other property managementrents. The primary driver of decreased operational expenses, specifically related expenses have increasedto repairs and maintenance expense, is due to increased competition for labor.the COVID-19 pandemic causing residential lease renewal rates to increase approximately 5.2% as compared to the same period in 2019, as residents chose to remain in their current apartment units, preventing general maintenance and unit upgrades to be performed. The Trust believes a portion of the decrease in repairs and maintenance is deferred and will be realized as the COVID-19 pandemic passes and the units become available to be upgraded.
Commercial expenses from operations of $5,485$5,124 during the nine months ended September 30, 20192020 decreased $77$361 or 1.4%6.6% in comparison to the same period in 2018.2019. The decrease in overall expenses is attributableattributed to the COVID-19 pandemic, causing shelter-in-place orders in many locations where our commercial properties are located, attributing to decreased utilities expense of $222 or 19.88% due to the decreased utility costs at a commercial property in Fargo, ND, while it is undergoing reconstruction and renovation. The repairs and maintenance costs relatedexpenses of $186 or 11%. Decreased utility expense of $87 or 9.7% in comparison to increased direct tenant billbacks of $119 or 100%, noted for the decrease in expenses forsame period 2019, also attributed to the three months ended, September 30, 2019, were offset by demolition costs of $129, that were recorded in the second quarter of 2019.overall decrease.
Interest expense of $13,819$12,761 during the nine months ended September 30, 2019 increased $1872020 decreased $1,058 in comparison to the same period in 2018 due2019. Payoffs of higher interest rate loans during the first quarter of 2020 and fourth quarter of 2019 as well as new debt and refinancing during 2020, decreased the overall weighted average interest rate on our mortgage debt. The lower mortgage rate decreased total interest paid on mortgages of $564 as compared to an increasethe same period in 2019, bringing mortgage interest expenses as a percent of income to 13.96% in 2020 versus 14.79% in 2019. Additionally, interest expense on construction in progress, also contributed to the decrease in interest expense relatedas compared to mortgage interest incurred on our acquired propertiesthe same period in the third and fourth quarters of 2018.2019. Interest expense was approximately 15.3% and 15.7% of rental incomefor construction in progress is classified as a contra-expense account, offsetting interest expense by $480 for the nine months ended September 30, 2019 and 2018, respectively.2020
Depreciation and amortization expense of $16,213$15,826 for the nine months ended September 30, 2019 increased $3062020 decreased $387 or 1.92%2.4% in comparison to the same period in 2018. 2019.The $306 increase wasdecrease is primarily a resultdue to the write off of increasescertain lease intangibles at an office building located in depreciation and amortization expenses attributed to acquisitions in the third and fourth quarters of 2018.Minneapolis, Minnesota. Amortization expense will generally continue to decrease as lease intangibles become fully amortized except whenbut will increase upon acquisitions occur.of intangible assets. Depreciation and amortization expense as a percentage of rental income for the nine months ended September 30, 20192020 and 20182019 was relatively consistent at 18.0%17.3% and 18.3%18.0%, respectively.
REIT administration expenses of $3,218 for the nine months ended September 30, 2020 increased $167 or 5.5% in comparison to the same period in 2019. The increase is attributable to an increase of REIT advisory fees paid as well as increased audit and tax fees attributed to additional services performed and general timing variances during the year 2020, as compared to 2019.
43
Other income of $328$2,204 for the nine months ended September 30, 2020 increased $1,876 or 572% in comparison to the same period in 2019. Realized gains of $1,456 on the sale of two commercial properties during the nine months ended September 30, 2020 is the primary factor in the increase as compared to the same period in 2019. Furthermore, net losses for the nine months ended September 30, 2019, decreased $6,088 or 94% in comparison toincluded an amount resulting from the same period in 2018. The decrease was primarily attributed to disposition activity in the prior period that did not occur in the current period. During the nine months ended September 30, 2018 we recognized a gain on involuntary conversion of $1,467 and a gain on sale of real estate investments of $4,298. Due to the evaluation and analysis of a commercial property in Fargo, ND,North Dakota, where it was determined that the future economic benefit of a portion of the property was determined to be non-recoverable. As such, during the threenine months ended September 30, 2019, we also experienced a loss on involuntary conversion of $816 due to the partial demolition of a commercialthat property, located in Fargo, ND. Basednetting to total gain on involuntary conversion of $487 for the facts and circumstances surrounding the demolition, we will not be recognizing insurance proceeds related to the loss. period then ended.
REIT administration expenses of $3,051 for the nine months ended September 30, 2019 decreased $652 or 17.63% in comparison to the same period in 2018, due to disposition fees recognized during the nine months ended September 30, 2018 of $583.
39
Net Operating Income
We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included above for more information on NOI performance by segment.
Net Income
Net income for the nine months ended September 30, 20192020was $12,081$16,890 compared to $17,321$12,081 for the nine months ended September 30, 2018. During2019.
COVID-19 Impact
The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. A number of uncertainties continue to exist at this time, including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the recent surge in COVID-19 cases in many states. While the Trust did not incur significant disruptions during the nine months ended September 30, 2018,2020 from the Company recognized gainsCOVID-19 pandemic, the effects of the ongoing COVID-19 pandemic could have material adverse effects on our business and results of operations, so long as COVID-19 continues to impact the U.S. economy in other income totaling $5,765,general and multifamily apartment communities in particular. The extent to which the economic disruption associated with the COVID-19 pandemic impacts our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. In particular, during the three months ended September 30, 2020, the Trust continued to monitor state and federal legislative actions and efforts in regards to the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen a number of tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that the COVID-19 and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.
During the quarter ended September 30, 2020, the Trust received certain rent relief requests as discussed above, which resulted in higher net incomea result of COVID-19. These requests were received principally from office tenants and most often in the prior period thanform of rent deferral requests. Few rental defaults have occurred to date and the current period. Operationally,Trust is pursuing legal remedies as to these amounts which are not material in the Company has seen increased income from operationsaggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of $689, which is attributed tofactors. Not all tenant requests will ultimately result in modification agreements, nor will the increased residential revenues during the 2019 period.Trust forgo its contractual rights under its lease agreements.
44
Property Acquisitions and Dispositions
Property Acquisitions and Dispositions during the nine months ended September 30, 2020
We acquired eight properties for a total of $21,191 during the nine months ended September 30, 2020. Total consideration for the acquisitions was the issuance of approximately $9,031 in limited partnership units of the operating partnership, assumed liabilities of $538, cash of $2,739, mortgage of $3,225, and 1031 exchange funds of $5,658.
We disposed of two commercial properties during the nine months ended September 30, 2020. The Trust disposed of a retail property located in Apple Valley, Minnesota for $3,670 and an office building in St. Cloud, Minnesota for $2,050.
See Notes 15 and 16 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the nine months ended September 30, 20192020 and 2018.2019.
Joint VentureConstruction in Progress and Development Projects
Construction in progress as of September 30, 2020 consists primarily of development and planning costs associated with the Goldmark Office Park building located in Fargo, North Dakota, the Montreal Courts Apartment located in Little Canada, Minnesota and the Bayview Apartments located in Fargo, North Dakota. The operating partnershipGoldmark Office Park consists of three commercial office buildings. Current expectations are that the project which includes building renovations, reconstruction of portions of the office park and additional amenities will be completed in phases with the primary phase completed in 2020. The current project budget is approximately $6,790 of which $6,718 has been incurred and is included in construction in progress. The Montreal Courts Apartments development consists of a 60% ownernew clubhouse. Current expectations are that the project will be completed in the fourth quarter of SE Savage, LLC (“SE Savage”).2020 and the current project budget approximates $3,752 of which $1,405 has been incurred and is included in construction in progress. The operating partnership contributed $1,323Bayview Apartments development consists of new windows and siding. Current expectations are that the project will be completed in cash to SE Savagethe fourth quarter of calendar year 2020 and the current project budget approximates $1,893 of which $1,152 has been incurred and is included in September 2019. construction in progress.
As of September 30, 2019,2020, the property owned by SE Savage consisteddevelopment project at the Glen Pond Apartments located in Eagan, Minnesota, was completed, and the development was put into service. Final cost of land. Itthe development was $16,540.
The Trust is SE Savage’s intent to develop a 190 unit multifamily property.involved with two joint ventures as of September 30, 2020.
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.
45
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,
40
improving the understanding of operating results of REITs among the investing public and making it easier 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 three and nine months ended September 30, 20192020 and 2018,2019, 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
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Three months ended September 30, 2019 | ||||||||||||
| | | | | Weighted Avg | | Per | | | | | Weighted Avg | | Per | ||
| | | | | Shares and | | Share and | | | | | Shares and | | Share and | ||
|
| Amount |
| Units(1) |
| Unit (2) |
| Amount |
| Units(1) |
| Unit (2) | ||||
| | (unaudited) | ||||||||||||||
| | (in thousands, except per share data) | ||||||||||||||
Net Income attributable to Sterling Real Estate Trust | | $ | 1,844 | | 9,740 | | $ | 0.19 | | $ | 1,213 | | 9,322 | | $ | 0.13 |
| | | | | | | | | | | | | | | | |
Add back: | | | | | | | | | | | | | | | | |
Noncontrolling Interest - OPU | | | 3,450 | | 18,232 | | | | | | 2,312 | | 17,822 | | | |
Depreciation & Amortization from continuing operations | | | 5,328 | | | | | | | | 5,322 | | | | | |
Pro rata share of unconsolidated affiliate depreciation & amortization | | | 95 | | | | | | | | 94 | | | | | |
Subtract: | | | | | | | | | | | | | | | | |
Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments | | | — | | | | | | | | — | | | | | |
Funds from operations applicable to common shares and limited partnership units (FFO) | | $ | 10,717 | | 27,972 | | $ | 0.38 | | $ | 8,941 | | 27,144 | | $ | 0.33 |
|
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|
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|
|
|
|
|
|
| Three months ended September 30, 2019 |
| Three months ended September 30, 2018 | ||||||||||||
|
|
|
|
| Weighted Avg |
| Per |
|
|
|
| Weighted Avg |
| Per | ||
|
|
|
|
| Shares and |
| Share and |
|
|
|
| Shares and |
| Share and | ||
|
| Amount |
| Units(1) |
| Unit (2) |
| Amount |
| Units(1) |
| Unit (2) | ||||
|
| (unaudited) | ||||||||||||||
|
| (in thousands, except per share data) | ||||||||||||||
Net Income attributable to Sterling Real Estate Trust |
| $ | 1,213 |
| 9,322 |
| $ | 0.13 |
| $ | 2,379 |
| 8,840 |
| $ | 0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest - OPU |
|
| 2,312 |
| 17,822 |
|
|
|
|
| 4,739 |
| 17,556 |
|
|
|
Depreciation & Amortization from continuing operations |
|
| 5,322 |
|
|
|
|
|
|
| 5,274 |
|
|
|
|
|
Depreciation & Amortization from discontinued operations |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
Pro rata share of unconsolidated affiliate depreciation & amortization |
|
| 94 |
|
|
|
|
|
|
| 94 |
|
|
|
|
|
Loss on sale of depreciable real estate investments |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
Loss on impairment of real estate investments |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
Subtract: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments |
|
| — |
|
|
|
|
|
|
| (3,214) |
|
|
|
|
|
Funds from operations applicable to common shares and limited partnership units (FFO) |
| $ | 8,941 |
| 27,144 |
| $ | 0.33 |
| $ | 9,272 |
| 26,396 |
| $ | 0.35 |
| (1) |
| Please see Note 9 and Note 11 to the consolidated financial statements included above for more information. |
| (2) |
| Net Income is calculated on a per share basis. FFO are calculated on a per share and unit basis. |
4146
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | | Nine months ended September 30, 2019 | |||||||||||
| | | | | Weighted Avg | | Per | | | | | Weighted Avg | | Per | ||
| | | | | Shares and | | Share and | | | | | Shares and | | Share and | ||
|
| Amount |
| Units(1) |
| Unit (2) |
| Amount |
| Units(1) |
| Unit (2) | ||||
| | (unaudited) | ||||||||||||||
| | (in thousands, except per share data) | ||||||||||||||
Net Income attributable to Sterling Real Estate Trust | | $ | 5,859 | | 9,638 | | $ | 0.61 | | $ | 4,148 | | 9,208 | | $ | 0.45 |
| | | | | | | | | | | | | | | | |
Add back: | | | | | | | | | | | | | | | | |
Noncontrolling Interest - OPU | | | 11,046 | | 18,170 | | | | | | 8,034 | | 17,837 | | | |
Depreciation & Amortization from continuing operations | | | 15,826 | | | | | | | | 16,213 | | | | | |
Pro rata share of unconsolidated affiliate depreciation & amortization | | | 283 | | | | | | | | 284 | | | | | |
Subtract: | | | | | | | | | | | | | | | | |
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments | | | (1,456) | | | | | | | | — | | | | | |
Funds from operations applicable to common shares and limited partnership units (FFO) | | $ | 31,558 | | 27,808 | | $ | 1.13 | | $ | 28,679 | | 27,045 | | $ | 1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2019 |
|
| Nine months ended September 30, 2018 | |||||||||||
|
|
|
|
| Weighted Avg |
| Per |
|
|
|
| Weighted Avg |
| Per | ||
|
|
|
|
| Shares and |
| Share and |
|
|
|
| Shares and |
| Share and | ||
|
| Amount |
| Units(1) |
| Unit (2) |
| Amount |
| Units(1) |
| Unit (2) | ||||
|
| (unaudited) | ||||||||||||||
|
| (in thousands, except per share data) | ||||||||||||||
Net Income attributable to Sterling Real Estate Trust |
| $ | 4,148 |
| 9,208 |
| $ | 0.45 |
| $ | 5,797 |
| 8,730 |
| $ | 0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest - OPU |
|
| 8,034 |
| 17,837 |
|
|
|
|
| 11,651 |
| 17,552 |
|
|
|
Depreciation & Amortization from continuing operations |
|
| 16,213 |
|
|
|
|
|
|
| 15,907 |
|
|
|
|
|
Pro rata share of unconsolidated affiliate depreciation & amortization |
|
| 284 |
|
|
|
|
|
|
| 282 |
|
|
|
|
|
Subtract: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments |
|
| — |
|
|
|
|
|
|
| (4,298) |
|
|
|
|
|
Funds from operations applicable to common shares and limited partnership units (FFO) |
| $ | 28,679 |
| 27,045 |
| $ | 1.06 |
| $ | 29,339 |
| 26,282 |
| $ | 1.12 |
| (1) |
| Please see Note 9 and Note 11 to the consolidated financial statements included above for more information. |
| (2) |
| Net Income is calculated on a per share basis. FFO are calculated on a per share and unit basis. |
FFO was impacted by the loss on involuntary conversion during the three and nine months ended September 30, 2019. The impact on FFO was a decrease of $0.03 and $0.018 per share, respectively. FFO was impacted by the gain on involuntary conversion during the three and nine months ended September 30, 2018. The impact on FFO was a gain of $0.0038 and $0.0558 per share.
Liquidity and Capital Resources
Our principal demands for funds will be for the (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption plans and (vi) capital improvements and property development related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests to our shareholders and the unit holders of our operating partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary. We expect to meet cash needs for acquisitions and other real-estate investments from cash flow from operations, net proceeds of share offerings and debt proceeds.
Evaluation of Liquidity
We continually evaluate our liquidity and ability to fund future operations, debt obligations and any repurchase requests. As part of our analysis, we consider among other items, credit quality of tenants and lease expirations.
Credit Quality of Tenants
We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.
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
42
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.
47
Lease Expirations and Occupancy
No significant leases are scheduled to expire or renew in the next twelve months. The Advisor, with the assistance of our commercial 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 commercial tenants elect not to renew, we may seek replacement tenants or try to sell the property.
Cash Flow Analysis
Our objectives are to generate sufficient cash flow over time to provide shareholders with increasing dividends and to seek investments with potential for strong returns and capital appreciation throughout varying economic cycles. We have funded 100% of the dividends from operating cash flows. In setting a dividend rate, we focus primarily on expected returns from investments we have already made to assess the sustainability of a particular dividend rate over time.
| | | | | | | ||||||
| | Nine Months Ended | ||||||||||
| | September 30, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
|
|
|
|
|
| |||||||
|
| Nine Months Ended | ||||||||||
|
| September 30, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (in thousands) | ||||||||||
| | (in thousands) | ||||||||||
Net cash flows provided by operating activities |
| $ | 34,015 |
| $ | 28,351 | | $ | 35,988 | | $ | 34,015 |
Net cash flows used in investing activities |
| $ | (9,883) |
| $ | (548) | | $ | (28,173) | | $ | (9,883) |
Net cash flows used in financing activities |
| $ | (32,097) |
| $ | (17,248) | | $ | (10,247) | | $ | (32,097) |
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 $34,015$35,988 and $28,351$34,015 for the nine months ended September 30, 20192020 and 2018,2019, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. The funds generated for the nine months ended September 30, 2019 and 2018 were primarily from property operations of our real estate portfolio.
Investing Activities
Our investing activities generally consist of real estate-related transactions (purchases and sales of properties) and payments of capitalized property-related costs such as intangible assets.
Net cash used in investing activities was $9,883$28,173 and $548$9,883 for the nine months ended September 30, 20192020 and 2018,2019, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the nine months ended September 30, 20192020 and 2018,2019, cash flows used in investing activities related primarilyspecifically to the 2018 acquisition of properties and capital expenditures was $10,258$33,059 and $14,718,$8,935, respectively. During the nine months ended September 30, 2020, a note receivable of $363 bearing a 6.5% interest rate, payable over five years was issued as well as two notes receivable equaling $400 bearing a 6% interest rate payable over three years. In addition, during the nine months ended September 30, 2019, a $1,300 revolving line of credit was made to an unrelated third party, which loan bears an interest rate of Prime Plus 2% or 7% as of September 30, 2019. In addition, during the nine months ended September 30, 20192020 and 2018,2019, proceeds of $1,513$1,077 and $1,111$1,513 were received from involuntary conversions.conversions, respectively. During the nine months ended September 30, 2018,2020, proceeds of $13,065$5,483 were generated from the sale of threetwo commercial properties.
43
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.
48
Net cash used in financing activities was $32,097$10,247 and $17,248$32,097 for the nine months ended September 30, 20192020 and 2018,2019, respectively. During the nine months ended September 30, 2020, we paid $17,012 in dividends and distributions, redeemed $2,786 of shares and units, received $22,910 from new mortgage notes payable, and made mortgage principal payments of $15,249. For the nine months ended September 30, 2019, we paid $16,333 in dividends and distributions, redeemed $1,573 of shares and units, received no proceeds from new mortgage notes payable, and made mortgage principal payments of $16,330. For
Dividends
Common Stock
We declared cash dividends to our shareholders during the nine months endedperiod from January 1, 2020 to September 30, 2018, we paid $16,001 in2020 totaling $7,648 or $0.7941 per share, of which $2,721 was cash dividends and $4,927 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $35,988 from our cash flows from operations and $239 provided by distributions redeemed $2,167 of shares and units, received proceeds from new mortgage notes payable of $10,281, and made mortgage principal payments of $12,028.unconsolidated affiliates.
Dividends
Common Stock
We declared cash dividends to our shareholders during the period from January 1, 2019 to September 30, 2019 totaling $7,216 or $0.78375$0.7838 per share, of which $2,548 was cash dividends and $4,668 were reinvested through the dividend reinvestment plan.
We declared The cash dividends towere paid with the $34,015 from our shareholders during the periodcash flows from January 1, 2018 to September 30, 2018 totaling $6,655 or $0.763125 per share, of which $2,317 was cash dividends and $4,338 were reinvested through the dividend reinvestment plan. 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 cash flow and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.
The following table presents certain information regarding our dividend coverage:
| | | | | | | ||||||
| | Nine Months Ended | ||||||||||
| | September 30, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
|
|
|
|
| ||||||||
|
| Nine Months Ended | ||||||||||
|
| September 30, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (in thousands) | ||||||||||
Cash flows provided by operations (includes net income of $12,081 and $17,321, respectively) |
| $ | 34,015 |
| $ | 28,351 | ||||||
| | (in thousands) | ||||||||||
Cash flows provided by operations (includes net income of $16,890 and $12,081, respectively) | | $ | 35,988 | | $ | 34,015 | ||||||
Distributions in excess of earnings received from unconsolidated affiliates |
|
| (32) |
|
| 88 | |
| 239 | |
| (32) |
Gain (Loss) on sales of real estate and non-real estate investments |
|
| — |
|
| 4,298 | |
| 1,456 | |
| — |
Dividends declared |
|
| (7,216) |
|
| (6,655) | |
| (7,648) | |
| (7,216) |
Excess |
| $ | 26,767 |
| $ | 26,082 | | $ | 30,035 | | $ | 26,767 |
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 nine months ended September 30, 2020, we declared quarterly distributions totaling $14,484 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, and October 15, 2020. Distributions were paid at a rate of $0.2647 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
For the nine months ended September 30, 2019, we declared quarterly distributions totaling $13,973 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, and October 15, 2019. Distributions were paid at a rate of $0.261250$0.2613 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
4449
Sources of Dividends
For the nine months ended September 30, 2018,2020, we declared quarterly distributions totaling $13,408 to holders of limited partnership units in our operating partnership, which we paid on April 16 and July 16, and October 15, 2018. Distributions were paid at a rate of $0.254375 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
Sources of Dividends
For the nine months ended September 30, 2019, we declared aggregate dividends of $7,216,$7,536, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was $28,679; therefore,$31,558. Therefore, our management believes our distribution policy is sustainable over time. For the nine months ended September 30, 2018,2019, we declaredpaid aggregate dividends of $6,655$7,060 which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was $29,339$28,679 as of the nine months ended September 30, 2018.2019. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.
Cash Resources
At September 30, 2019,2020, our unrestricted cash resources consisted of cash and cash equivalents totaling approximately $13,685.$6,499. 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 $43,335,$64,234, which could potentially be used as collateral to secure additional financing in future periods.
At September 30, 2019,2020, there was no balance outstanding on our lines of credit. The lines of credit aggregate $31,415 in total availability and are collateral for two letters of credit totaling $1,216, leaving $32,815$30,199 available and unused under the agreements. See Note 5 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.
The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the nine months ended September 30, 2019,2020, we did not sell any common shares in a private placement. During the nine months ended September 30, 2019,2020, we issued 255,000265,000 and 127,000134,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively, and raised gross proceeds of $7,003. $7,415. During the nine months ended September 30, 2018,2019, we did not sell any common shares in a private placement. During the nine months ended September 30, 2018,2019, we issued 243,000255,000 and 166,000178,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively, and raised gross proceeds of $7,336.$7,002.
During the nine months ended September 30, 2019, no partnership units were2020, we issued in relation to property acquisitions.
During the nine months ended September 30, 2018, we issued469,000 limited partnership units valued at approximately $2,176 in connection with six of the acquisition of of one property.eight properties acquired.
Off-Balance Sheet Arrangements
As of September 30, 20192020 and December 31, 2018,2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation
Substantially all of our multifamily property leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore will expose us to the effect of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter term leases.
As of September 30, 2019,2020, most of our commercial leases require tenants to pay directly or reimburse us for a share of our operating expenses. As a result, we are often able to pass on much of any increases to our property operating
45
expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the nine months ended September 30, 2019,2020, inflation did not have a material impact on our revenues or net income.
50
Item 3. Quantitative and QualitativeQualitative Disclosures about Market Risk
The principal material financial market risk to which we are exposed is interest-rate risk. Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate lines of credit.
As virtually all of our outstanding debt is long-term, fixed rate debt, our interest rate risk has not changed significantly from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the Securities and Exchange Commission on March 15, 2019.13, 2020.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019,2020, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the thirdsecond fiscal quarter of 2019 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
4651
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sale of Securities
Neither Sterling nor the operating partnership issued any unregistered securities during the three months ended September 30, 2019. 2020.
Other Sales
During the three months ended September 30, 2019,2020, we did not issue any common shares in exchange for limited partnership units of the operating partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Section 4 (a) (2) and Rule 506 of Regulation D.
Redemptions of Securities
Set forth below is information regarding common shares and limited partnership units redeemed during the nine months ended September 30, 2019:2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Total Number of |
| Total Number of |
| Approximate Dollar Value of | ||
|
| Total Number |
|
| Total Number |
| Price |
| Shares Redeemed |
| Units Redeemed |
| Shares (or Units) that May | ||
|
| of Common |
|
| of Limited |
| Paid per |
| as Part of |
| as Part of |
| Yet Be Redeemed Under | ||
|
| Shares |
|
| Partner Units |
| Common |
| Publicly Announced |
| Publicly Announced |
| Publicly Announced | ||
Period |
| Redeemed |
|
| Redeemed |
| Share/Unit |
| Plans or Programs |
| Plans or Programs |
| Plans or Programs | ||
January 1-31, 2019 |
| 3,000 |
|
| 5,000 |
| $ | 18.00 |
| 1,190,000 |
| 774,000 |
| $ | 7,743 |
February 1-28, 2019 |
| 2,000 |
|
| 3,000 |
| $ | 18.00 |
| 1,192,000 |
| 777,000 |
| $ | 7,655 |
March 1-31, 2019 |
| 6,000 |
|
| 27,000 |
| $ | 18.00 |
| 1,198,000 |
| 804,000 |
| $ | 7,059 |
Total |
| 11,000 |
|
| 35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1-30, 2019 |
| 4,000 |
|
| 5,000 |
| $ | 18.00 |
| 1,202,000 |
| 809,000 |
| $ | 6,905 |
May 1-31, 2019 |
| 2,000 |
|
| 8,000 |
| $ | 18.00 |
| 1,204,000 |
| 817,000 |
| $ | 6,728 |
June 1-30, 2019 |
| 3,000 |
|
| 3,000 |
| $ | 18.00 |
| 1,207,000 |
| 820,000 |
| $ | 6,632 |
Total |
| 9,000 |
|
| 16,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1-31, 2019 |
| 5,000 |
|
| 2,000 |
| $ | 18.00 |
| 1,212,000 |
| 822,000 |
| $ | 6,506 |
August 1-31, 2019 |
| 8,000 |
|
| 2,000 |
| $ | 18.00 |
| 1,220,000 |
| 824,000 |
| $ | 6,335 |
September 1-30, 2019 |
| — |
|
| 1,000 |
| $ | 18.00 |
| 1,220,000 |
| 825,000 |
| $ | 6,312 |
Total |
| 13,000 |
|
| 5,000 |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
| | | | | | | Average | | Total Number of | | Total Number of | | Approximate Dollar Value of | ||
| | Total Number | | | Total Number | | Price | | Shares Redeemed | | Units Redeemed | | Shares (or Units) that May | ||
| | of Common | | | of Limited | | Paid per | | as Part of | | as Part of | | Yet Be Redeemed Under | ||
| | Shares | | | Partner Units | | Common | | Publicly Announced | | Publicly Announced | | Publicly Announced | ||
Period |
| Redeemed | |
| Redeemed |
| Share/Unit |
| Plans or Programs |
| Plans or Programs |
| Plans or Programs | ||
January 1-31, 2020 | | 13,000 | | | 13,000 | | $ | 18.25 | | 1,250,000 | | 846,000 | | $ | 5,395 |
February 1-28, 2020 | | 4,000 | | | 14,000 | | $ | 18.25 | | 1,254,000 | | 860,000 | | $ | 5,065 |
March 1-31, 2020 | | 21,000 | | | 3,000 | | $ | 18.25 | | 1,275,000 | | 863,000 | | $ | 4,625 |
Total | | 38,000 | | | 30,000 | | | | | | | | | | |
| | | | | | | | | | | | | | | |
April 1-30, 2020 | | 53,000 | | | 5,000 | | $ | 18.25 | | 1,328,000 | | 868,000 | | $ | 3,582 |
May 1-31, 2020 | | 4,000 | | | 7,000 | | $ | 18.25 | | 1,332,000 | | 875,000 | | $ | 3,376 |
June 1-30, 2020 | | — | | | — | | $ | 18.25 | | 1,332,000 | | 875,000 | | $ | 8,376 |
Total | | 57,000 | | | 12,000 | | | | | | | | | | |
| | | | | | | | | | | | | | | |
July 1-31, 2020 | | — | | | 5,000 | | $ | 18.25 | | 1,332,000 | | 880,000 | | $ | 8,281 |
August 1-31, 2020 | | 3,000 | | | 1,000 | | $ | 18.25 | | 1,335,000 | | 881,000 | | $ | 8,205 |
September 1-30, 2020 | | 3,000 | | | 3,000 | | $ | 18.25 | | 1,338,000 | | 884,000 | | $ | 8,076 |
Total | | 6,000 | | | 9,000 | | | | | | | | | | |
For the threenine months ended September 30, 2019,2020, we redeemed all shares or units for which we received redemption requests. In addition, for the threenine months ended September 30, 2019,2020, all common shares and units redeemed were redeemed as part of the publicly announced plans.
The Amended and Restated Share Redemption Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our operating partnership, up to a maximum amount of $35,000$40,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of September 30, 2020, was $8,076. The redemption price for such shares and units redeemed under the plan was fixed at $17.50$18.25 per share or unit, which was increased to $18.00became effective January 1, 2019.2020. 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.
4752
Item 6. Exhibits.
Exhibit | | |
Number | | Title of Document |
| ||
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
101 | | The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, |
| | |
104 | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
4853
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:November 8, 20196, 2020
| STERLING REAL ESTATE TRUST | |
| | |
| By: | /s/ Kenneth P. Regan |
| | Kenneth P. Regan |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ Erica J. Chaffee |
| | Erica J. Chaffee |
| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
4954