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~~“Real estate rental ~~income~~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 ~~$65~~$31 and $39 for the three months ended September 30, 2020 and 2019, respectively. The straight-line rent adjustment decreased revenue by $169 and increased revenue by ~~$103~~$17 the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively. The straight-line receivable balance included in ~~other assets~~receivables on the consolidated balance sheets as of ~~March 31,~~September 30, 2020 and December 31, 2019 was ~~$3,093~~$2,982 and $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 ~~components~~component is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental 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’s~~Trust’s operating leases is comprised of the following:


							Three months ended September 30, 2020
							Residential		Commercial		Total

	Three months ended March 31, 2020
	Residential		Commercial		Total
	(in thousands)
							(in thousands)
Lease income related to fixed lease payments	$	23,203	$	4,714	$	27,917	$	24,080	$	4,630	$	28,710
Lease income related to variable lease payments		—		1,261		1,261		—		1,352		1,352
Other (a)		(257)		(90)		(347)		(170)		(36)		(206)
Lease Income (b)	$	22,946	$	5,885	$	28,831	$	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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

Three months ended  March 31, 2019


Residential

Commercial

Total

(in thousands)
Lease income related to fixed lease payments

$
22,797

$
4,777

$
27,574
Lease income related to variable lease payments

—

1,487

1,487
Other (a)

(217)

117

(100)
Lease Income (b)

$
22,580

$
6,381

$
28,961

(a)

For the three months ended ~~March 31,~~September 30, 2020 and 2019, “Other” is comprised of revenue adjustments related to changes in ~~collectibility~~collectability and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the three months ended ~~March 31,~~September 30, 2020 and 2019 of ~~$1,075~~$1,010 and ~~$870,~~$937, respectively, which is accounted for under the revenue recognition standard.

Table of Contents

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 nine months ended September 30, 2020, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the nine months ended September 30, 2020 of $2,969 and $2,743, respectively, which is accounted for under the revenue recognition standard.

As of ~~March 31,~~September 30, 2020, non-cancelable in place commercial operating leases provide for future minimum rental income as ~~follows.~~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)
2020 (April 1, 2020 – December 31, 2020)	$	13,288
			(in thousands)
2020 (October 1, 2020 - December 31, 2020)			$	4,408
2021		14,836		16,698
2022		11,453		14,170
2023		9,479		12,426
2024		9,017		11,666
Thereafter		42,479		59,879
	$	100,552
			$	119,247

Business Interruption Proceeds

In the Trust’s normal course of business we periodically receive insurance recoveries for business interruption. The Trust received no insurance recoveries for business interruption of $521 and $768 during the ~~three~~nine months ended ~~March 31,~~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 ~~March 31,~~September 30, 2020 and 2019, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

Table of Contents

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)

For the three months ended ~~March 31,~~September 30, 2020 and 2019, Sterling’s denominators for both basic and diluted earnings per common share were approximately 9,740,000 and 9,322,000, respectively. For the nine months ended September 30, 2020 and 2019, Sterling’s denominators for the basic and diluted earnings per common share were approximately ~~9,562,000~~9,638,000 and ~~9,091,000,~~9,208,000, respectively.

Incurred but Not Reported Insurance Liability

The ~~Company~~Trust maintains a business insurance program with deductible limits, which ~~cover~~covers property, business automobile and general liability claims. The ~~Company~~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 ~~Company~~Trust will adjust the property claim reserves, if necessary, in the event

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

future loss experience differs from historical loss patterns. As of ~~March 31,~~September 30, 2020 and December 31, 2019, property claim reserves were ~~$510~~$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.

We adopted this standard effective as of January 1, 2019, using the optional transition method to apply the standard as of the effective date. The ~~Company~~Trust elected to apply the package of practical expedients for the leases as lessor for its residential

Table of Contents

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 ~~Company~~Trust elected the practical expedient to combine lease and nonlease components for leases as lessor. Finally, the ~~Company~~Trust 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 ~~Company~~Trust 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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

NOTE 3 – segment reporting

We report our results in ~~two~~2 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 ~~property~~direct administrative ~~and management fees)~~costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization ~~legal and professional fees~~ and certain general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and nine months ended ~~March 31,~~September 30, 2020 and 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

	(in thousands)						(in thousands)
Income from rental operations	$	24,858	$	6,008	$	30,866	$	23,662	$	6,511	$	30,173
Expenses from rental operations		13,506		1,796		15,302		13,570		1,810		15,380
Net operating income	$	11,352	$	4,212	$	15,564	$	10,092	$	4,701	$	14,793
Depreciation and amortization						5,328						5,322
Interest						4,187						4,521
Administration of REIT						972						969
Other (income)/expense						(189)						511
Net income					$	5,266					$	3,470

Three months ended  March 31, 2020

Three months ended  March 31, 2019


Residential

Commercial

Total


Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
23,995

$
5,911

$
29,906

$
23,434

$
6,397

$
29,831
Expenses from rental operations

13,912

1,787

15,699

13,389

1,819

15,208
Net operating income

$
10,083

$
4,124

$
14,207

$
10,045

$
4,578

$
14,623
Depreciation and amortization

5,252

5,538
Interest

4,350

4,715
Administration of REIT

1,162

1,111
Other (income)/expense

(1,784)

(531)
Net income

$
5,227

$
3,790

~~Segment Assets and Accumulated Depreciation~~

As of March 31, 2020

Residential

Commercial

Total

(in thousands)
Real estate investments

$
622,753

$
196,554

$
819,307
Accumulated depreciation

(107,785)

(43,037)

(150,822)

$
514,968

$
153,517

668,485
Cash and cash equivalents

4,295
Restricted deposits and funded reserves

11,398
Investment in unconsolidated affiliates

7,848
Other assets

6,218
Note receivable

1,300
Intangible assets, less accumulated amortization

8,395
Total Assets

$
707,939

1921

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020 and 2019 (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

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
Other assets

8,244
Note receivable

1,300
Intangible assets, less accumulated amortization

9,133
Total Assets

$
699,686

Table of Contents

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 March 31, 2020

Intangibles

Amortization

Intangibles, net
Lease Intangible Assets

(in thousands)
In-place leases

$
21,018

$
(14,083)

$
6,935
Above-market leases

2,806

(1,346)

1,460

$
23,824

$
(15,429)

$
8,395
Lease Intangible Liabilities

Below-market leases

$
(3,067)

$
1,916

$
(1,151)


							Lease		Accumulated		Lease
As of September 30, 2020							Intangibles		Amortization		Intangibles, net

	Lease		Accumulated		Lease
As of December 31, 2019	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	21,480	$	(14,051)	$	7,429	$	20,197	$	(13,891)	$	6,306
Above-market leases		3,211		(1,507)		1,704		2,619		(1,254)		1,365
	$	24,691	$	(15,558)	$	9,133
							$	22,816	$	(15,145)	$	7,671
Lease Intangible Liabilities
Below-market leases	$	(3,088)	$	1,881	$	(1,207)	$	(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)

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)
2020 (April 1, 2020 – December 31, 2020)

$
1,028

$
156
2021

1,121

184
2022

987

164
2023

849

151
2024

849

151
Thereafter

3,561

345

$
8,395

$
1,151


	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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of ~~March 31,~~September 30, 2020 was ~~6.6~~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 June ~~2022;~~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 ~~March 31,~~September 30, 2020, the Bremer line of credit secured ~~two~~2 letters of credit totaling $1,216, leaving ~~$31,599~~$30,199 available and unused under the agreements.

Table of Contents

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 ~~include~~includes covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ~~ratios. We are not required to determine~~ratios on an annual and semi-annual basis. As of September 30, 2020, we were in compliance with all ~~covenants as of March 31, 2020; however, we have not received any notice of non-compliance with our covenants through the date of this filing.~~measured debt covenants. As of December 31, 2019, ~~three~~3 residential properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. An annual waiver was received from the lender.

NOTE 6 - MORTGAGE NOTES PAYABLE

The following table summarizes the ~~Company’s~~Trust’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

March 31,

December 31,

2020

2019

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

$
396,922

$
395,038
Less unamortized debt issuance costs

1,848

1,874

$
395,074

$
393,164

(a)

~~(a)~~

Includes ~~$16,079~~$31,017 and $12,960 of variable rate mortgage debt that was swapped to a fixed rate at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

As of ~~March 31,~~September 30, 2020, we had ~~121~~119 mortgage loans with effective interest rates ranging from ~~3.15%~~2.43% to ~~7.25%~~6.85% per annum and a weighted average effective interest rate of ~~4.30%~~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 4.31% per annum.

The majority of the ~~Company’s~~Trust’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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

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 ~~all~~our covenants as of ~~March 31,~~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, 2019, ~~ten~~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 $16,361 at December 31, 2019. Annual waivers ~~have been~~were received from the lenders on $10,435 of the loans out of compliance. Annual waivers were not received from ~~one~~1 lender on loans with a balance of $5,926. The Trust elected to pay the loans off in March 2020 with no penalty.

Table of Contents

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)
2020 (April 1, 2020 – December 31, 2020)	$	21,654
			(in thousands)
2020 (October 1, 2020 - December 31, 2020)			$	8,126
2021		32,575		27,580
2022		26,753		25,841
2023		49,526		49,115
2024		16,943		18,076
Thereafter		249,471		277,186
Total payments	$	396,922	$	405,924

NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we have used derivative instruments to manage our exposure to interest rate movements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Trust making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.

As of ~~March 31,~~September 30, 2020, the Trust used ~~four~~8 interest rate swaps to hedge the variable cash flows associated with variable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive loss and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. Over the next ~~nine~~three months, the Trust estimates that an additional ~~$30~~$93 will be reclassified as ~~a $30~~an increase to interest expense.

The following table summarizes the Trust’s interest rate swaps as of ~~March 31,~~September 30, 2020, which effectively convert on month floating rate LIBOR to a fixed rate:


			Fixed

							Fixed
Effective Date		Notional	Interest Rate	Maturity Date		Notional	Interest Rate	Maturity Date
April 15, 2005	$	801	7.25%	April 15, 2020
November 1, 2019	$	7,121	3.15%	November 1, 2029	$	7,026	3.15%	November 1, 2029
November 1, 2019	$	4,946	3.28%	November 1, 2029	$	4,881	3.28%	November 1, 2029
January 10, 2020	$	3,211	3.39%	January 10, 2030	$	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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

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

							Number of Instruments			Notional
Interest Rate Derivatives	March 31, 2020	December 31, 2019		March 31, 2020		December 31, 2019	September 30, 2020	December 31, 2019		September 30, 2020		December 31, 2019
Interest rate swaps	4	3	$	16,079	$	12,960	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 accompanying consolidated balance sheets. The valuation techniques are described in Note 8 to the consolidated financial statements.

Table of Contents

Derivatives
Derivatives designated as

March 31, 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
$
1,449

Accrued expenses and other liabilities
$
21

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
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 swaps have been adjusted to their 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 swap. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income. The following table presents the effect of the ~~Company’s~~Trust’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended ~~March 31,~~September 30, 2020 and 2019:


			Location of Gain
		Amount of (Gain)/Loss	Reclassified from


								Location of Gain
							Amount of (Gain)/Loss	Reclassified from		Amount of (Gain)/Loss
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss		Recognized in Other	Accumulated other		Reclassified from
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from		Comprehensive Income	Comprehensive Income		AOCI into Income
Relationships		on Derivatives	(AOCI) into Income		AOCI into income		on Derivatives	(AOCI) into Income		Nine Months Ended
		2020			2020
							2020			2020
Interest rate swaps	$	1,486	Interest expense	$	10	$	2,125	Interest expense	$	145
		2019			2019
							2019			2019
Interest rate swaps	$	(4)	Interest expense	$	7	$	(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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

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 ~~March 31,~~September 30, 2020, the termination value of derivatives in a liability position, which includes accrued interest ~~but excludes any~~and adjustment for non-performance risk, which the Trust has deemed not significant, was ~~$1,449.~~$2,088. As of ~~March 31,~~September 30, 2020, the Trust has pledged the properties related to the loans which are hedged as collateral. IfAs of September 30, 2020, if the Trust had breached any of these provisions ~~as of March 31, 2020,~~ it could have been required to settle its obligations under the agreements at their termination value of ~~$1,449~~$2,088.

Table of Contents

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 8 - FAIR VALUE MEASUREMENT

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


									September 30, 2020				December 31, 2019
									Carrying				Carrying
									Value		Fair Value		Value		Fair Value

	March 31, 2020 (unaudited)				December 31, 2019 (audited)
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
									(in thousands)
Financial assets:
Note receivable	$	1,300	$	1,320	$	1,300	$	1,389	$	2,043	$	2,156	$	1,300	$	1,389
Derivative assets	$	—	$	—	$	58	$	58	$	—	$	—	$	58	$	58


Financial liabilities:
Mortgage notes payable, net	$	395,074	$	426,891	$	393,164	$	415,183	$	404,114	$	439,341	$	393,164	$	415,183
Derivative liabilities	$	1,449	$	1,449	$	21	$	21	$	2,088	$	2,088	$	21	$	21

The carrying values shown in the table are included in the consolidated balance sheets under the ~~captions~~ indicated ~~in Note 7.~~ 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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

Recurring Fair Value Measurements

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


	Level 1		Level 2		Level 3		Total

	(in thousands)
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)
March 31, 2020

Derivative liabilities

$
—

$
1,449

$
—

$
1,449
December 31, 2019 (audited)

Derivative assets

$
—

$
58

$

$
58
Derivative liabilities

$
—

$
21

$
—

$
21

Table of Contents

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 Trust also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although the Trust 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 ~~March 31,~~September 30, 2020 and December 31, 2019,, the ~~Company~~Trust has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the ~~Company~~Trust has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the ~~Company~~Trust has considered any applicable credit enhancements. The ~~Company’s~~Trust’s derivative instruments are further described in Note 7.

Fair Value Disclosures

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

Level 1

Level 2

Level 3

Total

(in thousands)
March 31, 2020

Mortgage notes payable, net

$
—

$
—

$
426,891

$
426,891
December 31, 2019 (audited)

Mortgage notes payable, net

$
—

$
—

$
415,183

$
415,183


	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 ~~Company~~Trust estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the ~~Company~~Trust for similar debt instruments of comparable maturities by the ~~Company’s~~Trust’s lenders. Judgment is used in determining the appropriate rate for each of the ~~Company’s~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

Trust’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 ~~3.25%~~3.05% to ~~3.35%~~3.20% and from 3.75% to 3.80% at ~~March 31,~~September 30, 2020 and December 31, 2019,, respectively. The fair value of the ~~Company’s~~Trust’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 ~~March 31,~~September 30, 2020 and December 31, 2019. The ~~Company’s~~Trust’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.

Table of Contents

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 ~~March 31,~~September 30, 2020 and December 31, 2019, outstanding limited partnership units totaled ~~18,251,000~~18,229,000 and 17,811,000 respectively. ~~Total aggregate distributions per unit were $0.2647 and $0.2613 during~~For the three months ended ~~March 31, 2020 and 2019, respectively. As of March 31,~~September 30, 2020 and 2019, the operating partnership declared ~~first quarter~~ distributions of ~~$4,831~~$4,825 and ~~$4,661~~$4,655 respectively, to limited partners which were paid on ~~April~~October 15, 2020 and 2019, respectively. Distributions per unit were $0.7941 and $0.7838 during the nine months ended September 30, 2020 and 2019, respectively.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020 ~~and 2019,~~ there were no0 limited partnership units exchanged for common shares pursuant to redemption requests.

At the sole and absolute discretion of the limited partnership, and so long as our redemption plans ~~exists~~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, ~~or (ii)~~(2) offer shares in lieu of cash for the redemption on a basis of ~~one~~1 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 $18.25 per share or unit under the plans, which price became effective January 1, 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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, the ~~Company~~Trust redeemed ~~38,000~~101,000 and ~~11,000~~33,000 common shares valued at ~~$696~~$1,853 and ~~$197,~~$593, respectively. In addition, during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, the ~~Company~~Trust redeemed ~~30,000~~52,000 and ~~35,000~~55,000 units valued at ~~$541~~$933 and ~~$629,~~$980, respectively. ~~The total amount remaining available under the plan as of March 31, 2020 is $4,625 worth of securities.~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

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 ~~March 31,~~September 30, 2020 and December 31, 2019, there were ~~9,547,000~~9,737,000 and 9,436,000 common shares outstanding, respectively. We had no0 preferred shares outstanding as of either date.

Table of Contents

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)

Dividends paid to holders of common shares were ~~$0.2647~~$0.7941 per share and ~~$0.2613~~$0.7838 per share for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively. As of ~~March 31,~~September 30, 2020 and 2019, the operating partnership declared ~~first quarter distributions~~dividends of ~~$2,527~~$2,577 and ~~$2,374,~~$2,435 respectively, to holders of common shares which were paid on ~~April~~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.

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 $19.25 and $19.00 at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. See discussion of determination of estimated value in Note 16.

Therefore, the purchase price per common share for dividend reinvestments was $18.29 and $18.05 and for additional optional cash purchases was $19.25 and $19.00 at ~~March 31,~~September 30, 2020 and December 31, 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~~ten-day notice to participants.

In the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~87,000~~265,000 shares were issued pursuant to dividend reinvestments and ~~62,000~~134,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at ~~$1,584~~$4,836 and ~~$1,203~~$2,579 respectively.

In the ~~three~~nine months ended ~~March 31,~~September 30, 2019, ~~82,000~~255,000 shares were issued pursuant to dividend reinvestments and ~~49,000~~127,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at ~~$1,479~~$4,591 and ~~$929,~~$2,411 respectively.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

NOTE 13 – RELATED PARTY TRANSACTIONS

Property Management ~~Fee~~Fees

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, we paid property management fees and administrative fees to GOLDMARK Property Management, Inc. GOLDMARK Property Management ~~Inc.~~ is owned in part by Kenneth Regan, James Wieland and Joel Thomsen. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, we paid management fees, on-site staff costs and other miscellaneous fees required to run the property of ~~$3,312~~$9,518 and ~~$3,123,~~$9,530, respectively, to GOLDMARK Property Management, Inc. Management fees paid during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, approximated 5% of net collected rents. In addition, during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019,

Table of Contents

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 ~~Inc.~~ totaling ~~$1,627~~$4,849 and ~~$1,474,~~$4,664, respectively.

Board of Trustee Fees

We incurred Trustee fees of ~~$20~~$49 and ~~$16~~$44 during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively. As of ~~March 31,~~September 30, 2020, and December 31, 2019 we owed our Trustees ~~$49~~$14 and $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.

The plan provides:



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

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

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and ~~Executive Officers~~executive officers responsible for our management, we have no0 paid employees. The following is a brief description of the current fees and compensation that may be ~~and was~~ received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 26, 2020, effective until March 31, 2021.

Management ~~Fee:~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, we incurred advisory management fees of ~~$765~~$2,321 and ~~$749~~$2,244 with Sterling Management, LLC, our Advisor. As of ~~March 31,~~September 30, 2020 and December 31, 2019, we owed our Advisor ~~$256~~$262 and $503, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

staff required to manage our day-to-day operations. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020 ~~we reimbursed our Advisor for $5 in operating costs. During the three months ended March 31,~~and 2019, we ~~did not reimburse~~reimbursed the Advisor for ~~any~~ operating ~~costs.~~costs totaling $22 each period, respectively. As of ~~March 31,~~September 30, 2020, we owed our Advisor $5$11 for unpaid operating costs. ~~As of December 31, 2019, there were no operating costs owed to our Advisor.~~

Acquisition ~~Fee:~~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.

Table of Contents

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 ~~three~~nine months ended ~~March 31,~~September 30, 2020, we incurred ~~$302 in~~ acquisition fees ~~with our advisor.~~of $500. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019 there were no0 acquisition fees incurred with our Advisor. See Note 16. There were no0 acquisition fees owed to our Advisor as of ~~March 31,~~September 30, 2020 or December 31, 2019.

Disposition ~~Fee:~~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.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we incurred disposition fees of ~~$92 with our Advisor.~~$143. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, there were no0 disposition fees incurred with our Advisor. See Note 15. There were no0 disposition fees owed to our Advisor as of ~~March 31,~~September 30, 2020 or December 31, 2019.

Financing ~~Fee:~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 we incurred financing fees of ~~$25~~$82 with our Advisor. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, there were no0 financing fees incurred with our Advisor. As of September 30, 2020, we owed the advisor $2 for finance fees incurred. There were no0 financing fees owed to our Advisor as of ~~March 31, 2020 or~~ December 31, 2019.

Project Management Fee: 6% of all completed capital improvement projects on the real estate investments owned by the Trust are paid to the Advisor.

During the nine months ended September 30, 2020, there were $226 in project management fees incurred with our Advisor for capital improvement projects. As of September 30, 2020 we owed our Advisor $22 for unpaid project management fees.

Development ~~Fee:~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 ~~and~~we incurred development fees of $715 with our Advisor. During the nine months ended September 30, 2019, there were no0 development fees incurred with our Advisor. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, our Advisor decided to forgo the $104 portion of ~~the~~ held back

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

development ~~fee~~fees related to the Stonefield development project which was recognized as a reduction in building and improvements. ~~There were no~~As of September 30, 2020, there was $794 of development fees owed to our Advisor as of ~~March 31, 2020 and December 31, 2019.~~

~~Project Management Fee:~~ ~~6% of all completed capital improvement projects on real estate investments owned by the Trust are paid~~which $79 is due to the ~~Advisor.~~

~~Our Advisor began completing our capital improvement projects in September 2019. These projects were previously performed by our property managers. During~~10% hold back with respect to the three months ended March 31, 2020, there were $17 in project management fees incurred with our Advisor for capital improvement projects. There were no project management fees owed to our Advisor as of March 31, 2020.Glen Pond development project. As of December 31, 2019, we owed our Advisor ~~$67~~a total of $104 for ~~project management fees.~~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.

Table of Contents

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 ~~three~~nine months ended ~~March 31,~~September 30, 2020, we issued directly or indirectly 176,000 operating partnership units to an entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $3,373.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, there were no0 operating partnership units issued directly or indirectly, to affiliated entities.

Commissions

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we incurred real estate commissions of ~~$324,~~$583, to GOLDMARK Commercial Real Estate Services, Inc., which is controlled by Messrs. Regan and Wieland. During the ~~three~~nine months ended ~~March~~September 30, 2019, there were 0 commissions incurred with GOLDMARK Commercial Real Estate Services, Inc.. As of September 30, 2020, we owed $250 in commissions to GOLDMARK Commercial Real Estate Services, Inc. As of December 31, 2019, there were no0 unpaid commissions ~~incurred. There were no outstanding commissions owed as of March 31, 2020 or December 31, 2019.~~to GOLDMARK Commercial Real Estate Services, Inc.

~~Rental Income~~

During the ~~three~~nine months ended ~~March~~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 2019, we received rental income of ~~$66~~$63 and ~~$57,~~$42, respectively, under an operating lease agreement with ~~GOLDMARK Property Management, Inc..~~our Advisor.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, we received rental income of ~~$14~~$43 and ~~$14,~~$42, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, we received rental income of ~~$21~~$202 and ~~$13,~~$173, respectively, under operating lease agreements with ~~our Advisor.~~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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

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

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

Table of Contents

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

Litigation

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

Significant Risks and Uncertainties

The ~~Company is~~Trust continues to closely ~~monitoring~~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. ~~While~~A number of uncertainties continue to exist at this time, including but not limited to the ~~Company~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 from the COVID-19 ~~pandemic, it~~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.

~~In April,~~During the ~~Company~~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,~~requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as ~~a result of COVID-19.~~to these amounts which are not material in the aggregate. The ~~Company is evaluating each~~Trust will continue to evaluate any further tenant rent relief ~~request~~requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor iswill the ~~Company forgoing~~Trust forgo its contractual rights under its lease agreements.

NOTE 15 – DISPOSITIONS

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the operating partnership sold ~~one property.~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2019, the operating partnership did not dispose of any properties.

3134

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2020 and 2019 (UNAUDITED)

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

NOTE 16 – ACQUISITIONS

The ~~Company~~Trust closed on the following acquisitions during the ~~three~~nine months ended ~~March 31,~~September 30, 2020.

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

$
12,066
(a)

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

20,016

(b)

(a)

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

(b)

Acquisition price does not include capitalized closing costs and adjustments totaling ~~$636,~~$842, special assessments assumed and capitalized of ~~$168~~$307 or additional costs incurred due to a difference in unit price of $26.

Total consideration given for acquisitions through ~~March 31,~~September 30, 2020 was completed through issuing approximately 469,000 limited partnership units of the operating partnership valued at $19.25 per unit for an aggregate consideration of approximately $9,031, assumed liabilities of ~~$265,~~$538, a mortgage of $3,225, 1031 exchange funds of $5,658 and cash of ~~$375.~~$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 ~~Company~~Trust had no0 acquisitions during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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


	Three Months Ended
	March 31,
		2020		2019


						Nine Months Ended
						September 30,
							2020		2019

Land, building, tenant improvements and FF&E	$	12,896	$	-		$	21,191	$	-
Other liabilities		(265)		-			(538)		-
Net assets acquired		12,631		-			20,653		-
Equity/limited partnership unit consideration		(9,031)		-			(9,031)		-
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange					Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange	(5,658)		-
New loans		(3,225)		-			(3,225)		-


Net cash consideration	$	375	$	-		$	2,739	$	-

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in the first ~~three~~nine months of 2020 and 2019. In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in the first ~~three~~nine months of 2020 and 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

Table of Contents

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2020 and 2019~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share 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 $19.25 per share/unit effective January 1, 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 ~~2231~~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~~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 ~~April~~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, 2020, we paid a dividend or distribution of ~~$0.2647~~$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 ~~March 31,~~September 30, 2020.

~~On April 15, 2020, we refinanced a mortgage totaling approximately $1,180.~~

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.

3336

Table of Contents

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

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

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

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

Overview

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 ~~178~~179 properties containing ~~10,040~~10,184 apartment units and approximately ~~1,657,000~~1,692,000 square feet of leasable commercial space as of ~~March 31, 2020.~~September 30, 2020. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately ~~$668,485,~~$682,862, which includes construction in progress. ~~Currently~~ Sterling’s current acquisition strategy and focus is ~~solely~~ on multifamily apartment ~~properties.~~ 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 ~~March 31,~~September 30, 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

Table of Contents

As of ~~March 31,~~September 30, 2020, approximately ~~74.0%~~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‑term~~short-term leases.

As of ~~March 31,~~September 30, 2020, approximately ~~26.0%~~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 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 26, 2020, effective until March 31, 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 ~~nine~~eight members on our board, ~~seven~~six of whom are independent.

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

Our Advisor

Our external Advisor is Sterling Management, LLC, a North Dakota limited liability company formed in November 2002. Our Advisor, with headquarters in Fargo, North Dakota, is responsible for managing our day-to-day affairs, ~~overseeing~~ capital projects and 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 2628 full-time employees. ~~On February 1, 2020, Joel Thomsen was appointed Chief Executive Officer of our Advisor. Kenneth Regan remains as Executive Chairman of the Board of Governors of our Advisor.~~

Critical Accounting Estimates

Preparation of our financial statements requires estimates and judgments to be made that ~~affect~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 included elsewhere in this report.

Table of Contents

Specific Achievements

●

~~Acquired six new residential properties during~~Increased revenues from rental operations by $693 or 2.3% for the three months ended ~~March 31,~~September 30, 2020,

compared to the same three month period in 2019.

●

Increased revenues from rental operations by $1,318 or 1.5% for the nine months ended September 30, 2020, compared to same nine month period in 2019.

~~Declared~~●

Acquired seven residential properties and ~~paid~~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 ~~$0.2647~~$0.7941 per common share for the ~~three~~nine months ~~ending March 31,~~ended September 30, 2020.

~~Table of Contents~~

Results of Operations for the Three Months Ended ~~March 31,~~September 30, 2020 and 2019

Three months ended  March 31, 2020

Three months ended  March 31, 2019


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)

(in thousands)

(in thousands)
Real Estate Revenues

$
23,995

$
5,911

$
29,906

$
23,434

$
6,397

$
29,831
Real Estate Expenses

Real Estate Taxes

2,476

688

3,164

2,350

679

3,029
Property Management

3,305

249

3,554

3,114

209

3,323
Utilities

2,419

304

2,723

2,560

326

2,886
Repairs and Maintenance

4,889

507

5,396

4,772

585

5,357
Insurance

823

39

862

593

20

613
Total Real Estate Expenses

13,912

1,787

15,699

13,389

1,819

15,208
Net Operating Income

$
10,083

$
4,124

14,207

$
10,045

$
4,578

14,623
Interest

4,350

4,715
Depreciation and amortization

5,252

5,538
Administration of REIT

1,162

1,111
Other (income)/expense

(1,784)

(531)
Net Income

$
5,227

$
3,790

Net Income Attributed to:

Noncontrolling Interest

$
3,414

$
2,502
Sterling Real Estate Trust

$
1,813

$
1,288
Dividends per share (1)

$
0.2647

$
0.2613
Earnings per share

$
0.1900

$
0.1400
Weighted average number of common shares

9,562

9,091


	Three months ended September 30, 2020						Three months ended September 30, 2019
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	24,858	$	6,008	$	30,866	$	23,662	$	6,511	$	30,173
Real Estate Expenses
Real Estate Taxes		2,486		674		3,160		2,343		693		3,036
Property Management		3,100		203		3,303		3,220		258		3,478
Utilities		1,776		287		2,063		1,708		309		2,017
Repairs and Maintenance		5,351		596		5,947		5,795		531		6,326
Insurance		793		36		829		504		19		523
Total Real Estate Expenses		13,506		1,796		15,302		13,570		1,810		15,380
Net Operating Income	$	11,352	$	4,212		15,564	$	10,092	$	4,701		14,793
Interest						4,187						4,521
Depreciation and amortization						5,328						5,322
Administration of REIT						972						969
Other (income)/expense						(189)						511
Net Income					$	5,266					$	3,470

Net Income Attributed to:
Noncontrolling Interest					$	3,422					$	2,257
Sterling Real Estate Trust					$	1,844					$	1,213
Dividends per share⁽¹⁾					$	0.2647					$	0.2613
Earnings per share					$	0.19					$	0.13
Weighted average number of common shares						9,740						9,322

(1)

~~(1)~~

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

Revenues

Property revenues of ~~$29,906~~$30,866 for the three months ended ~~March 31,~~September 30, 2020 increased ~~$75~~$693 or ~~0.3%~~2.3% in comparison to the same period in 2019. Residential property revenues increased ~~$561~~$1,196 and commercial property revenues decreased ~~$486.~~$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	%

March 31,

March 31,

2020

2019

Residential occupancy

92.8
%
93.5
%
Commercial occupancy

90.0
%
90.3
%

Table of Contents

Residential revenues for the three months ended ~~March 31,~~September 30, 2020 increased ~~$561~~$1,196 or 5.1% in comparison to the same period for 2019. Residential properties acquired since January 1, 2020 contributed approximately ~~$242~~$644 to the increase in total residential revenues ~~for~~in the three months ended ~~March 31,~~September 30, 2020. 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 related to Ratio Utility Billing System (RUBS) ~~income~~Income in our Minneapolis, Minnesota market. The overall residential income increase was offset by increased vacancy, primarily in our Minneapolis, Minnesota market. Residential revenues comprised 80.5% of total revenues for the three months ended September 30, 2020 compared to 78.4% of total revenues for the three months ended September 30, 2019. The vacancy increase, coincides with a decrease in residential occupancy rates for the three months ended ~~March 31,~~September 30, 2020 ~~decreased 0.7% primarily due to considerable increased competition in the Minneapolis market.~~of 0.70%.

For the three months ended ~~March 31,~~September 30, 2020, total commercial revenues decreased ~~$486~~$503 or 7.7% in comparison to the same period for 2019. ~~The decrease was primarily attributable to~~Vacant office space in commercial properties located in the ~~loss on involuntary conversion of a commercial property in~~ Fargo, ~~ND, where the future economic benefit of a portion~~North Dakota region constituted $217 of the ~~property was determined to be non recoverable. Based~~

~~Table~~decreased revenues. As of ~~Contents~~

~~on the facts and circumstances surrounding the property, the property remains vacant during the redevelopment phase, and no business loss proceeds from insurance were received~~September 30, 2020, these properties are considered fully leased through an executed 12 year lease. In addition, disposition of two commercial properties, account for ~~this property~~$141 in decreased revenues during the three months ended ~~March 31,~~September 30, 2020. ~~Subsequent~~The remaining decrease relates to the amortization of straight line rents at a commercial office building in our Minneapolis, Minnesota market as well as overall decreased estimated common area maintenance income for the three months ended ~~March 31,~~September 30, 2020 ~~proceeds of $267 were received~~as compared to the same period in ~~relation to this property as payment for business interruption loss. These proceeds relate to both the year ended 2019 and the three months ended March 31, 2020.~~2019. Commercial revenues comprised ~~19.8%~~19.5% of the total revenues for the three months ended ~~March 31,~~September 30, 2020 compared to ~~21.4%~~21.6% of total revenues for the three months ended ~~March 31,~~September 30, 2019. ~~The commercial occupancy rates for~~

Expenses

Residential expenses from operations of $13,506 during the three months ended ~~March 31,~~September 30, 2020 ~~remained~~decreased $64 or 0.5% in comparison to the same period in 2019. Though the net decrease is relatively comparable to the same period in ~~2019.~~

~~Expenses~~

~~Residential~~2019, expenses ~~from operations~~as shown in the above table vary significantly by category as compared to the same period in 2019. The net decrease is attributed to decreased repairs and maintenance expense of ~~$13,912~~$444 or 7.7%, offset by increased real estate taxes of $142 or 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 also decreased during the three months ended ~~March 31,~~September 30, 2020. As noted above, the primary driver of decreased operational 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 ~~increased $523~~decreased $14 or ~~3.9%~~0.8% in comparison to the same period in 2019. The ~~increase was primarily~~net decrease in overall expenses is attributed to ~~Incurred but Not Reported Reserve (IBNR) claims~~COVID-19, causing shelter-in-place orders in many locations where our office space is located, resulting in decreased property management expenses of ~~$306~~$55 or 21.4% and decreased utility costs of $22 or 7.1%. Furthermore, repairs and maintenance expense for the three months ended September 30, 2020 increased $65 or 12.2%, offsetting the above decreases. A primary factor for reported ~~during~~increased repairs and maintenance expense, is due to 2019 direct tenant billbacks of $120, offsetting repairs and maintenance expense for the ~~first quarter of 2020, which did not exist in the first quarter of 2019. This was offset by a $75 decrease in traditional insurance expense. Increased real estate taxes of $126 or 5.3%,~~period then ended. Repairs and ~~professional fees of $76~~maintenance expense decreased $55 when focusing specifically on expenses incurred related to ~~construction projects initially sought for approval, but then deemed unnecessary that were reclassified as expenses in the first quarter~~business operations.

Interest expense of 2020, also contributed to the overall operational expense increase. Actual property management fees increased $97 or 8.5% but continue to approximate 5% of net collected rents. Other property management related expenses remained comparable to prior year.

~~Commercial expenses from operations of $1,787~~$4,187 during the three months ended ~~March 31,~~September 30, 2020 decreased ~~$32~~$334 or ~~1.8%~~7.4% in comparison to the same period in 2019. The decrease was attributed to decreased repairs and maintenance expenses of $78 or 13.3% with snow removal responsible for $52 or 34.5% of this amount. Utility expenses during the three months ended March 31, 2020 decreased by $22 or 6.7% in comparison to the same period 2019, also attributed to the overall decrease. These expense decreases were offset by an increase in marketing and advertising expenses during the three months ended March 31, 2020 of $32 in comparison to the same period in 2019, which are included in property management expenses.

~~Interest expense of $4,350 during the three months ended March 31, 2020 decreased $365 or 7.7% in comparison to the same period in 2019. Pay offs~~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 ~~notes payable.~~debt. The lower ~~average interest~~mortgage rate decreased total interest paid on mortgages ~~for~~by $172 during the three months ended ~~March 31,~~September 30, 2020 ~~by $209 or 4.62%~~ as compared to the same period in ~~2019.Interest~~2019, leading to mortgage interest expense ~~was approximately 14.5% and 15.8%~~as a percent of ~~rental~~ income ~~for the three months ended March 31,~~of 13.65% in 2020 ~~and 2019, respectively.~~versus 14.53% in 2019. Additionally, interest expense on construction in progress, also contributed to the decrease in interest ~~expense.~~expense as compared to the same period in 2019. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense ~~and resulting in a decrease of $127 in interest expense~~by $165 during the three months ended ~~March 31,~~September 30, 2020.

Table of Contents

Depreciation and amortization expense of $5,328 during the three months ended September 30, 2020 ~~versus~~increased $6 or 0.1% in comparison to the same period in 2019.

Depreciation and amortization expense of $5,252 during the three months ended March 31, 2020 decreased $286 or 5.2% in comparison to the same period. The decrease is primarily due to the write off of certain lease intangibles due to lease terminations at an office building located in Minneapolis, MN. 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 ~~March 31,~~September 30, 2020 and 2019 was ~~17.6%~~17.26% and ~~18.6%~~17.64%, respectively.

REIT administration expenses of ~~$1,162~~$972 during the three months ended ~~March 31,~~September 30, 2020 increased ~~$51~~$3 or ~~4.6%~~0.3% in comparison to the same period in 2019, showing administrative expenses remaining consistent as compared to the same period in 2019. ~~The increase is attributable to an increase in the amount of the REIT advisory fee as well as increased legal costs associated with the review of general entity related matters.~~

Other income of ~~$1,784 for~~$189 during the three months ended ~~March 31,~~September 30, 2020 increased ~~$1,253~~$700 or ~~236%~~136.99% in comparison to the same period in 2019. The primary reason for the increase was ~~primarily attributed to disposition activity in~~that the ~~first quarter of 2020 that did not occur in the same period in 2019. The total gain on sale~~future economic benefit of a ~~real estate investment located~~portion of a commercial property in ~~Apple Valley, MN~~Fargo, North Dakota was ~~$1,455.~~determined to be non-recoverable. As such, during the three months ended September 30, 2019, we also experienced a loss on involuntary conversion of $816 due to the partial demolition of that property. There is no such loss recorded for the three months ended September 30, 2020.

~~Table of Contents~~

Net Operating Income

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

~~Residential NOI of $10,083 during the three months ended March 31, 2020 increased $38 or 0.4% in comparison~~ See Note 3 to the ~~same three month period in 2019. Commercial~~Consolidated Financial Statements included above for more information on NOI of $4,124 during the three months ended March 31, 2020 decreased $454 or 9.9% in comparison to the same three month period in 2019. Decrease in commercial NOI is attributable to the vacant office building in Fargo, ND.performance by segment.

Net Income

Net income for the three months ended ~~March 31,~~September 30, 2020was ~~$5,227~~$5,266 compared to ~~$3,790~~$3,470 for the three months ended ~~March 31,~~September 30, 2019. As noted above, the primary driver of increased net income for the three months ended September 30, 2020 is attributed to eight property acquisitions occurring in 2020, as well as the impact the COVID-19 pandemic has had on the operational expenses of the portfolio.

Table of Contents

Results of Operations for the Nine Months Ended September 30, 2020


	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

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

Revenues

Property revenues of $91,593 for the nine months ended September 30, 2020 increased $1,318 or 1.5% in comparison to the same period in 2019. Residential property revenues increased $2,314 and commercial property revenues decreased $996, from the prior year’s comparable nine month period.

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


	September 30,		September 30,
	2020		2019
Residential occupancy	93.1	%	93.8	%
Commercial occupancy	93.6	%	91.8	%

Residential revenues for the nine months ended September 30, 2020 increased $2,314 or 3.3% in comparison to the same period for 2019. Residential properties acquired since January 1, 2020 contributed approximately $1,282 to the increase in total residential revenues in the nine months ended September 30, 2020. 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 related to Ratio Utility Billing System (RUBS) Income in our Minneapolis, 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. Residential occupancy year-over-year decreased 0.7%, offsetting the residential revenue increase by $601 and is attributed to the increased vacancy, primarily in our Minneapolis, Minnesota market.

Table of Contents

For the nine months ended September 30, 2020, total commercial revenues decreased $996 or 5.1% in comparison to the same period for 2019. The decrease was primarily attributable to the disposition of two commercial properties which accounted for $255 of the decrease during the nine months ended September 30, 2020. Vacant office space in commercial properties located in the Fargo, North 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 20.0% of the total revenues for the nine months ended September 30, 2020 compared to 21.4% of total revenues for the nine months ended September 30, 2019. Commercial occupancy year-over-year remained comparable at approximately 89%.

Expenses

Residential expenses from operations of $39,978 during the nine months ended September 30, 2020 increased $24 or 0.1% in comparison to the same period in 2019. Though the net increase 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. Increased insurance expense of $734 or 44.6% due to increased 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 $985 or 6.3% as well as decreased utilities expense of $148 or 2.4%. Actual property management fees remained unchanged and continue to approximate 5% of net collected rents. The primary driver of decreased operational expenses, specifically related to repairs and maintenance expense, is due to 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 $5,124 during the nine months ended September 30, 2020 decreased $361 or 6.6% in comparison to the same period in 2019. The decrease in overall expenses is attributed to the COVID-19 pandemic, causing shelter-in-place orders in many locations where our commercial properties are located, attributing to decreased repairs and maintenance expenses of $186 or 11%. Decreased utility expense of $87 or 9.7% in comparison to the same period 2019, also attributed to the overall decrease.

Interest expense of $12,761 during the nine months ended September 30, 2020 decreased $1,058 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 mortgage debt. The lower mortgage rate decreased total interest paid on mortgages of $564 as compared to the 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 as compared to the same period in 2019. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense by $480 for the nine months ended September 30, 2020

Depreciation and amortization expense of $15,826 for the nine months ended September 30, 2020 decreased $387 or 2.4% in comparison to the same period in 2019.The decrease is primarily due to the write off of certain lease intangibles at an office building located in Minneapolis, Minnesota. 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 nine months ended September 30, 2020 and 2019 was relatively consistent at 17.3% and 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.

Table of Contents

Other income of $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, included an amount resulting from the evaluation of a commercial property in Fargo, North Dakota, where it was determined that the future economic benefit of a portion of the property was non-recoverable. As such, during the nine months ended September 30, 2019, we also experienced a loss on involuntary conversion of $816 due to the partial demolition of that property, netting to total gain on involuntary conversion of $487 for the period then ended.

Net Operating Income

Net Income

Net income for the nine months ended September 30, 2020was $16,890 compared to $12,081 for the nine months ended September 30, 2019.

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, 2020 from the COVID-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 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 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.

Table of Contents

Property Acquisitions and Dispositions

Property Acquisitions and Dispositions during the ~~three~~nine months ended ~~March 31,~~September 30, 2020

We acquired ~~six~~eight properties for a total of ~~$12,896~~$21,191 during the ~~three~~nine months ended ~~March 31,~~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 ~~$265,~~$538, cash of ~~$375 and a~~$2,739, mortgage of ~~$3,225.~~$3,225, and 1031 exchange funds of $5,658.

We disposed of ~~one~~two commercial properties during the nine months ended September 30, 2020. The Trust disposed of a retail property located in Apple Valley, MNMinnesota for ~~$3,670.~~$3,670 and an office building in St. Cloud, Minnesota for $2,050.

~~Property Acquisitions and Dispositions during the three months ended March 31, 2019~~

~~There were no acquisitions or dispositions during the three months ended March 31, 2019.~~

See Notes 15 and 16 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019.

Construction in Progress and Development Projects

Construction in progress as of ~~March 31,~~September 30, 2020 consists primarily of development and planning costs associated with ~~an addition to our~~ the ~~Glen Pond development in Eagan, Minnesota and redevelopment at our~~ Goldmark Office Park ~~1715 and 1711 buildings~~building located in Fargo, North ~~Dakota. The Glen Pond development consists of~~Dakota, the ~~addition of 114 multifamily units to our property. Current expectations are that the project will be completed~~Montreal Courts Apartment located in ~~the second or third quarter of calendar year 2020~~Little Canada, Minnesota and the ~~current project budget approximates $15,598.~~Bayview Apartments located in Fargo, North Dakota. The Goldmark 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~~office park and additional amenities will be completed in phases with the primary phase completed in ~~the second quarter of calendar year~~ 2020. The current project budget is approximately ~~$3,833.~~$6,790 of which $6,718 has been incurred and is included in construction in progress. The Montreal Courts Apartments development consists of a new clubhouse. Current expectations are that the project will be completed in the fourth quarter of 2020 and the current project budget approximates $3,752 of which $1,405 has been incurred and is 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 calendar year 2020 and the current project budget approximates $1,893 of which $1,152 has been incurred and is included in construction in progress.

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.

The Trust is 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.

~~Table of Contents~~

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.

Table of Contents

Since the introduction of the definition of FFO, the term has come to be widely used by REITs. In the view of National Association of Real Estate Investment Trusts (“NAREIT”), the use of the definition of FFO (combined with the primary GAAP presentations required by the Securities and Exchange Commission) has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making it easier 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 ~~March 31,~~September 30, 2020 and 2019, respectively. We believe these calculations are the most comparable GAAP financial ~~measure:~~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

Three months ended  March 31, 2020

Three months ended  March 31, 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

$
1,813

9,562

$
0.19

$
1,288

9,091

$
0.14

Add back:

��

Noncontrolling Interest - OPU

3,419

18,036

2,532

17,860

Depreciation & Amortization from continuing operations

5,252

5,538

Pro rata share of unconsolidated affiliate depreciation & amortization

94

95

Subtract:

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

(1,455)

—

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

$
9,123

27,598

$
0.33

$
9,453

26,951

$
0.35

(1)

~~(1)~~

Please see Note 9 and Note 11 to the consolidated financial statements included above for more information.

(2)

~~(2)~~

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

3946

Table of Contents


	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

(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.

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.

Historically, the geographic location of our properties and credit-worthiness of our tenants have resulted in minimal to no property impairments or write-offs on uncollectible rental revenues. While we currently anticipate the trend to continue, the impact of COVID-19 is unknown and cannot be reasonably anticipated. It is possible, however, our rental revenues will have negative impacts and tenants may file for bankruptcy or default on their leases in the future and that economic conditions may deteriorate.

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

Table of Contents

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.

~~Table of Contents~~

~~Credit-risk related Contingent Features~~

As of March 31, 2020, the termination value of the derivative is in a liability position, which includes accrued interest but excludes any adjustment for non-performance risk, which the Trust has deemed not significant, was $1,449. As of March 31, 2020, the Trust has pledged the properties related to the loans which are hedged as collateral. If the Trust had breached any of these provisions as of March 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $1,449.

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

	Three Months Ended
	March 31,
	2020		2019
	(in thousands)
					(in thousands)
Net cash flows provided by operating activities	$	7,184	$	8,280	$	35,988	$	34,015
Net cash flows used in investing activities	$	(1,613)	$	(848)	$	(28,173)	$	(9,883)
Net cash flows used in financing activities	$	(7,260)	$	(8,428)	$	(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 ~~$7,184~~$35,988 and ~~$8,280~~$34,015 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. The funds generated for the three months ended March 31, 2020 and 2019 were $1,455 from the gain on sale of a retail property in the 2020 three month period and the remainder was from property operations of our real estate portfolio.

Investing Activities

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

Net cash used in investing activities was ~~$1,613~~$28,173 and ~~$848~~$9,883 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, cash flows used in investing activities related specifically to the acquisition of properties and capital expenditures was ~~$5,433~~$33,059 and ~~$1,263,~~$8,935, respectively. ~~The increase in~~During the ~~current period~~nine months ended September 30, 2020, a note receivable of $363 bearing a 6.5% interest rate, payable over five years was ~~primarily due to purchase of six properties~~issued as well as two notes receivable equaling $400 bearing a 6% interest rate payable over three years. In addition, during the ~~three~~nine months ended ~~March 31, 2020.~~September 30, 2020 and 2019, proceeds of $1,077 and $1,513 were received from involuntary conversions, respectively. During the nine months ended September 30, 2020, proceeds of $5,483 were generated from the sale of two commercial properties.

~~Table of Contents~~

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.

Table of Contents

Net cash used in financing activities was ~~$7,260~~$10,247 and ~~$8,428~~$32,097 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we paid ~~$5,534~~$17,012 in dividends and distributions, redeemed ~~$1,237~~$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, and made mortgage principal payments of ~~$9,129. For the three months ended March 31, 2019, we paid $5,349 in dividends and distributions, redeemed $826 of shares and units, and made mortgage principal payments of $3,150.~~$16,330.

Dividends

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 2020 to ~~March 31,~~September 30, 2020 totaling ~~$2,527~~$7,648 or ~~$0.2647~~$0.7941 per share, of which ~~$919 were~~$2,721 was cash dividends and ~~$1,608~~$4,927 were reinvested ~~under~~through the dividend reinvestment plan. The cash dividends were paid with the ~~$7,184~~$35,988 from our cash flows from operations and ~~$105~~$239 provided by distributions from unconsolidated affiliates.

We declared cash dividends to our shareholders during the period from January 1, 2019 to ~~March 31,~~September 30, 2019 totaling ~~$2,374~~$7,216 or ~~$0.2613~~$0.7838 per share, of which ~~$881 were~~$2,548 was cash dividends and ~~$1,556~~$4,668 were reinvested ~~under~~through the dividend reinvestment plan. The cash dividends were paid with the ~~$8,280~~$34,015 from our cash flows from ~~operations and $121 provided by distributions from unconsolidated affiliates.~~operations.

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

	Three Months Ended
	March 31,
	2020		2019
	(in thousands)
Cash flows provided by operations (includes net income of $5,227 and $3,790, respectively)	$	7,184	$	8,280
					(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		105		121		239		(32)
Gain (Loss) on sales of real estate and non-real estate investments		1,455		—		1,456		—
Dividends declared		(2,527)		(2,374)		(7,648)		(7,216)
Excess	$	6,217	$	6,027	$	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 ~~three~~nine months ended ~~March 31,~~September 30, 2020, we declared quarterly distributions totaling ~~$4,831~~$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.

~~Table of Contents~~

For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, we declared quarterly distributions totaling ~~$4,661~~$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 $0.2613 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

Table of Contents

Sources of Dividends

For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we paid aggregate dividends of ~~$2,465,~~$7,536, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was ~~$9,123 for the three months ended March 31, 2020; therefore we believe~~$31,558. Therefore, our management believes our distribution policy is sustainable over time. For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, we paid aggregate dividends of ~~$2,281~~$7,060 which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was ~~$9,453~~$28,679 as of the ~~three~~nine months ended ~~March 31,~~September 30, 2019. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.

Cash Resources

At ~~March 31,~~September 30, 2020, our unrestricted cash resources consisted of cash and cash equivalents totaling approximately ~~$4,295.~~$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 ~~$72,030,~~$64,234, which could potentially be used as collateral to secure additional financing in future periods.

At ~~March 31,~~September 30, 2020, there was no balance outstanding on ~~the $32,815 line~~our lines of credit. The ~~line~~lines of credit isaggregate $31,415 in total availability and are collateral for two letters of credit totaling $1,216, leaving ~~$31,599~~$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 ~~three~~nine months ended ~~March 31,~~September 30, 2020, we did not sell any common shares in a private placement. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~87,000~~we issued 265,000 and 134,000 common shares ~~were issued pursuant to dividend reinvestments and 62,000 were issued pursuant to additional optional cash purchases~~ under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively, and raised gross proceeds of ~~$2,787.~~ $7,415. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, we did not sell any common shares in a private placement. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, ~~82,000~~we issued 255,000 and 178,000 common shares ~~were issued pursuant to dividend reinvestments and 49,000 were issued pursuant to additional optional cash purchases~~ under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively, and raised gross proceeds of ~~$2,408.~~$7,002.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we issued 469,000 limited partnership units in connection with six of the eight properties acquired.

~~During the three months ended March 31, 2019, we issued no limited partnership units in connection with acquisition of properties.~~

We believe we have sufficient available cash and access to both committed and uncommitted credit facilities as well as future securities issuances to cover our expected funds needs on both a short-term and long-term basis.

Off-Balance Sheet Arrangements

As of ~~March 31,~~September 30, 2020 and December 31, 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

~~Table of Contents~~

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 ~~March 31,~~September 30, 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 ~~increase~~increases to our property operating expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, inflation did not have a material impact on our revenues or net income.

Table of Contents

Item 3. Quantitative and ~~Qualitative~~Qualitative 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 ~~our interest rate swaps~~ and our variable rate lines of credit.

~~The carrying amount of our interest rate swaps have been adjusted to their fair value at March 31, 2020, resulting in a liability of $1,449.~~

As ~~much~~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, 2019 filed with the Securities and Exchange Commission on March 13, 2020.

Item 4. Controls and ~~Procedures.~~ 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 ~~March 31,~~September 30, 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 ~~first~~second fiscal quarter of 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

4451

Table of Contents

PART II

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 ~~March 31,~~September 30, 2020.

Other Sales

During the three months ended ~~March 31,~~September 30, 2020, we did not ~~issued~~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)~~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 ~~three~~nine months ended ~~March 31,~~September 30, 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

											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		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	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	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	21,000	3,000	$	18.25	1,275,000	863,000	$	4,625
Total	38,000	30,000							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 ~~three~~nine months ended ~~March 31,~~September 30, 2020, we redeemed all shares or units for which we received redemption requests. In addition, for the ~~three~~nine months ended ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2020, was ~~$4,625.~~$8,076. The redemption price for such shares and units redeemed under the plan was fixed at $18.25 per share or unit, which became effective January 1, 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.

4552

Table of Contents

Item 6. Exhibits.

~~Item 6. Exhibits.~~

Exhibit
Number		Title of Document
~~10.1~~		~~Ninth Amended and Restated Advisory Agreement,effective April 1, 2020~~
31.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

101		The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2020 formatted in ~~XBRL (eXtensible~~iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~March 31,~~September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019; (iii) Consolidated Statements of Shareholders’ Equity for the three and nine months ended ~~March 31, 2020 and 2019;~~September 30, 2020; (iv) Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, and; (v) Notes to Consolidated Financial Statements.

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

4653

Table of Contents

SIGNATURES

~~SIGNATURES~~

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

Dated:~~May 8,~~November 6, 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)

4754

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)



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



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


Class		Outstanding at ~~May 6,~~November 4, 2020
Common Shares of Beneficial Interest, $0.01 par value per share		~~9,614,311~~9,875,345.28

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of ~~March 31,~~September 30, 2020 and December 31, 2019 ~~(audited)~~	3
Consolidated Statements of Operations and Other Comprehensive Income – Three and nine months ended ~~March 31,~~September 30, 2020 and 2019	4
Consolidated Statements of Shareholders’ Equity – Three and nine months ended ~~March 31,~~September 30, 2020 and 2019	5
Consolidated Statements of Cash Flows – ~~Three~~Nine months ended ~~March 31,~~September 30, 2020 and 2019	6 7
Notes to Consolidated Financial Statements	8 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44 51
Item 4. Controls and Procedures	44 51

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45 52
Item 6. Exhibits	46 53
Signatures	47 54


	March 31,		December 31,
	2020		2019
	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	116,102	$	114,666
Building and improvements		686,188		676,228
Construction in progress		17,017		11,134
Real estate investments		819,307		802,028
Less accumulated depreciation		(150,822)		(146,316)
Real estate investments, net		668,485		655,712
Cash and cash equivalents		4,295		9,002
Restricted deposits		11,398		8,380
Investment in unconsolidated affiliates		7,848		7,915
Note receivable		1,300		1,300
Lease intangible assets, less accumulated amortization of $15,429 in 2020 and $15,558 in 2019		8,395		9,133
Other assets, net		6,218		8,244

Total Assets	$	707,939	$	699,686

LIABILITIES
Mortgage notes payable, net	$	395,074	$	393,164
Dividends payable		7,358		7,118
Tenant security deposits payable		4,648		4,439
Lease intangible liabilities, less accumulated amortization of $1,916 in 2020 and $1,881 in 2019		1,151		1,207
Accrued expenses and other liabilities		13,697		14,711
Total Liabilities		421,928		420,639

COMMITMENTS and CONTINGENCIES - Note 14

SHAREHOLDERS' EQUITY
Beneficial interest		103,750		102,373
Noncontrolling interest
Operating partnership		181,299		174,221
Partially owned properties		2,411		2,416
Accumulated other comprehensive loss		(1,449)		37
Total Shareholders' Equity		286,011		279,047

	$	707,939	$	699,686


	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


			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


				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



Residential Property	Location	No. of Properties	Units	Location	No. of Properties	Units
	North Dakota	111	6,348
	Minnesota	16	3,033
	Missouri	1	164
	Nebraska	3	495
		131	10,040

				North Dakota	112	6,378
				Minnesota	16	3,147
				Missouri	1	164
				Nebraska	3	495
					132	10,184

Commercial Property	Location	No. of Properties	Sq. Ft	Location	No. of Properties	Sq. Ft
	North Dakota	20	780,000
	Arkansas	2	28,000
	Colorado	1	17,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	14	675,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		47	1,657,000
				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


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


	Three months ended March 31, 2019
	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	22,797	$	4,777	$	27,574
Lease income related to variable lease payments		—		1,487		1,487
Other (a)		(217)		117		(100)
Lease Income (b)	$	22,580	$	6,381	$	28,961


As of March 31, 2020	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	622,753	$	196,554	$	819,307
Accumulated depreciation		(107,785)		(43,037)		(150,822)
	$	514,968	$	153,517		668,485
Cash and cash equivalents						4,295
Restricted deposits and funded reserves						11,398
Investment in unconsolidated affiliates						7,848
Other assets						6,218
Note receivable						1,300
Intangible assets, less accumulated amortization						8,395
Total Assets					$	707,939


	Intangible		Intangible
Years ending December 31,	Assets		Liabilities
	(in thousands)
2020 (April 1, 2020 – December 31, 2020)	$	1,028	$	156
2021		1,121		184
2022		987		164
2023		849		151
2024		849		151
Thereafter		3,561		345
	$	8,395	$	1,151


	Principal Balance At
	March 31,		December 31,
	2020		2019
	(in thousands)
Fixed rate mortgage notes payable (a)	$	396,922	$	395,038
Less unamortized debt issuance costs		1,848		1,874
	$	395,074	$	393,164


	Derivatives
Derivatives designated as	March 31, 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	$	1,449	Accrued expenses and other liabilities	$	21


	Level 1		Level 2		Level 3		Total
	(in thousands)
March 31, 2020
Derivative liabilities	$	—	$	1,449	$	—	$	1,449
December 31, 2019 (audited)
Derivative assets	$	—	$	58	$		$	58
Derivative liabilities	$	—	$	21	$	—	$	21


	Three months ended March 31, 2020						Three months ended March 31, 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	$	1,813	9,562	$	0.19	$	1,288	9,091	$	0.14

Add back:							��
Noncontrolling Interest - OPU		3,419	18,036				2,532	17,860
Depreciation & Amortization from continuing operations		5,252					5,538
Pro rata share of unconsolidated affiliate depreciation & amortization		94					95
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(1,455)					—
Funds from operations applicable to common shares and limited partnership units (FFO)	$	9,123	27,598	$	0.33	$	9,453	26,951	$	0.35