UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~September 30, 2020~~March 31, 2021

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

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

Commission File Number: 000-54295

Sterling Real Estate Trust

d/b/a Sterling Multifamily Trust

(Exact name of registrant as specified in its charter)

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

1711 Gold Drive South, Suite 100, Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

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

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



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

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

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

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



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

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

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

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


Class		Outstanding at ~~November 4, 2020~~May 11_. 2021
Common Shares of Beneficial Interest, $0.01 par value per share		~~9,875,345.28~~10,084,442

Table of Contents

STERLING REAL ESTATE TRUST ~~AND SUBSIDIARIES~~

INDEX

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	3
Consolidated Statements of Operations and Other Comprehensive Income – Three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	4
Consolidated Statements of Shareholders’ Equity – Three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	5
Consolidated Statements of Cash Flows – ~~Nine~~Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~	76
Notes to Consolidated Financial Statements	98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3734
Item 3. Quantitative and Qualitative Disclosures About Market Risk	5146
Item 4. Controls and Procedures	5146

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5247
Item 6. Exhibits	5348
Signatures	5449

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of ~~September 30, 2020~~March 31, 2021 (UNAUDITED) and December 31, ~~2019~~2020

September 30,

December 31,

2020

2019

(in thousands)
ASSETS

Real estate investments

Land and land improvements

$
119,242

$
114,666
Building and improvements

710,496

676,228
Construction in progress

12,278

11,134
Real estate investments

842,016

802,028
Less accumulated depreciation

(159,154)

(146,316)
Real estate investments, net

682,862

655,712
Cash and cash equivalents

6,499

9,002
Restricted deposits

8,451

8,380
Investment in unconsolidated affiliates

8,846

7,915
Notes receivable

2,043

1,300
Lease intangible assets, less accumulated amortization of $15,145 in 2020 and $15,558 in 2019

7,671

9,133
Other assets, net

7,049

8,244

Total Assets

$
723,421

$
699,686

LIABILITIES

Mortgage notes payable, net

$
404,114

$
393,164
Dividends payable

7,402

7,118
Tenant security deposits payable

4,908

4,439
Lease intangible liabilities, less accumulated amortization of $1,987 in 2020 and $1,881 in 2019

1,044

1,207
Accrued expenses and other liabilities

20,549

14,711
Total Liabilities

438,017

420,639

COMMITMENTS and CONTINGENCIES - Note 14

SHAREHOLDERS' EQUITY

Beneficial interest

106,210

102,373
Noncontrolling interest

Operating partnership

178,881

174,221
Partially owned properties

2,401

2,416
Accumulated other comprehensive loss

(2,088)

37
Total Shareholders' Equity

285,404

279,047

$
723,421

$
699,686


	March 31,		December 31,
	2021		2020

	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	119,114	$	119,088
Building and improvements		719,637		712,560
Construction in progress		9,339		13,640
Real estate investments		848,090		845,288
Less accumulated depreciation		(165,200)		(160,575)
Real estate investments, net		682,890		684,713
Cash and cash equivalents		13,888		11,716
Restricted deposits and funded reserves		16,459		15,919
Investment in unconsolidated affiliates		11,664		9,659
Notes receivable		2,009		2,026
Assets held for sale		830		831
Lease intangible assets, less accumulated amortization of $14,507 in 2021 and $15,019 in 2020		7,075		7,367
Other assets, net		10,449		10,798

Total Assets	$	745,264	$	743,029

LIABILITIES
Mortgage notes payable, net	$	425,164	$	421,278
Dividends payable		7,477		7,447
Tenant security deposits payable		5,084		4,908
Lease intangible liabilities, less accumulated amortization of $1,934 in 2021 and $1,963 in 2020		947		994
Liabilities related to assets held for sale		17		5
Accrued expenses and other liabilities		12,716		16,869
Total Liabilities		451,405		451,501

COMMITMENTS and CONTINGENCIES - Note 16

SHAREHOLDERS' EQUITY
Beneficial interest		110,992		109,366
Noncontrolling interest
Operating partnership		179,911		181,621
Partially owned properties		2,377		2,346
Accumulated other comprehensive (loss) income		579		(1,805)
Total Shareholders' Equity		293,859		291,528

	$	745,264	$	743,029

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~September 30,~~March 31, 2021 and 2020 (UNAUDITED)


	Three Months Ended
	March 31,
	2021		2020

	(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	31,760	$	29,906
Expenses
Expenses from rental operations
Operating expenses, excluding real estate taxes		12,107		12,535
Real estate taxes		3,244		3,164
Depreciation and amortization		5,328		5,252
Interest		4,287		4,350
		24,966		25,301
Administration of REIT		1,201		1,162
Total expenses		26,167		26,463
Income from operations		5,593		3,443

Other income
Equity in income of unconsolidated affiliates		(27)		158
Other income		270		119
Gain on sale of real estate and non-real estate investments		—		1,455
Gain on involuntary conversion		—		52
		243		1,784
Net income	$	5,836	$	5,227
Net income (loss) attributable to noncontrolling interest:
Operating Partnership		3,753		3,419
Partially owned properties		31		(5)
Net income attributable to Sterling Real Estate Trust	$	2,052	$	1,813

Net income attributable to Sterling Real Estate Trust per common share, basic and diluted	$	0.21	$	0.19

Comprehensive income:
Net income	$	5,836	$	5,227
Other comprehensive gain (loss) - change in fair value of interest rate swaps		2,384		(1,486)
Comprehensive income		8,220		3,741
Comprehensive income attributable to noncontrolling interest		5,325		2,442
Comprehensive income attributable to Sterling Real Estate Trust	$	2,895	$	1,299

Weighted average Common Shares outstanding, basic and diluted		9,983		9,562

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED March 31, 2021 and ~~2019~~2020 (UNAUDITED)


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

	(in thousands)
BALANCE AT DECEMBER 31, 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 and distributions 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


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

	(in thousands)
BALANCE AT DECEMBER 31, 2020	9,855	$ 139,105	(29,739)	$ 109,366	$ 181,621	$ 2,346	($ 1,805)	$ 291,528
Shares/units redeemed	(41)	(777)	-	(777)	(628)	-	-	(1,405)
Dividends and distributions declared	-	-	(2,642)	(2,642)	(4,835)	-	-	(7,477)
Dividends reinvested - stock dividend	89	1,686	-	1,686	-	-	-	1,686
Issuance of shares under optional purchase plan	65	1,307	-	1,307	-	-	-	1,307
Change in fair value of interest rate swaps	-	-	-	-	-	-	2,384	2,384
Net income	-	-	2,052	2,052	3,753	31	-	5,836
BALANCE AT MARCH 31, 2021	9,968	$ 141,321	($ 30,329)	$ 110,992	$ 179,911	$ 2,377	$ 579	$ 293,859

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED March 31, 2021 and 2020 (UNAUDITED)

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


	Three Months Ended
	March 31,
	2021		2020

	(in thousands)
OPERATING ACTIVITIES
Net income	$	5,836	$	5,227
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of real estate investments		—		(1,455)
Gain on involuntary conversion		—		(52)
Equity in loss (income) of unconsolidated affiliates		27		(158)
Distributions of earnings of unconsolidated affiliates		57		158
Allowance for uncollectible accounts receivable		(47)		113
Depreciation		5,006		4,868
Amortization		315		380
Amortization of debt issuance costs		130		140
Effects on operating cash flows due to changes in
Other assets		229		1,449
Tenant security deposits payable		176		131
Accrued expenses and other liabilities		(2,820)		(3,617)
NET CASH PROVIDED BY OPERATING ACTIVITIES		8,909		7,184
INVESTING ACTIVITIES
Purchase of real estate investment properties		—		(375)
Capital expenditures and tenant improvements		(3,686)		(5,058)
Proceeds from sale of real estate investments and non-real estate investments		—		3,494
Proceeds from involuntary conversion		1,642		259
Investment in unconsolidated affiliates		(2,090)		(38)
Distributions in excess of earnings received from unconsolidated affiliates		1		105
Notes receivable payments received		17		—
NET CASH USED IN INVESTING ACTIVITIES		(4,116)		(1,613)
FINANCING ACTIVITIES
Payments for financing, debt issuance		(154)		(98)
Payments on investment certificates and subordinated debt		(25)		—
Principal payments on special assessments payable		—		(253)
Proceeds from issuance of mortgage notes payable and subordinated debt		18,485		7,788
Principal payments on mortgage notes payable		(14,528)		(9,129)
Proceeds from issuance of shares under optional purchase plan		1,307		1,203
Shares/units redeemed		(1,405)		(1,237)
Dividends/distributions paid		(5,761)		(5,534)
NET CASH USED IN FINANCING ACTIVITIES		(2,081)		(7,260)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS		2,712		(1,689)
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF YEAR		27,635		17,382
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF QUARTER	$	30,347	$	15,693

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF QUARTER
Cash and cash equivalents	$	13,888	$	4,295
Restricted deposits		16,459		11,398
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF QUARTER	$	30,347	$	15,693

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS’ EQUITY~~CASH FLOWS

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~September 30,~~March 31, 2021 and 2020(UNAUDITED) (Continued)

Accumulated

Noncontrolling

Distributions

Total

Interest

Accumulated

Common

Paid-in

in Excess of

Beneficial

Operating

Partially Owned

Comprehensive

Shares

Capital

Earnings

Interest

Partnership

Properties

Income (Loss)

Total

(in thousands)
BALANCE AT DECEMBER 31, 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


	Three Months Ended
	March 31,
	2021		2020

	(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	4,144	$	4,203

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	1,686	$	1,584
Dividends declared and not paid		2,642		2,527
UPREIT distributions declared and not paid		4,835		4,831
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		—		9,031
Increase in land improvements due to increase in special assessments payable		26		65
Unrealized gain (loss) on interest rate swaps		2,384		(1,486)
Acquisition of assets with new financing		—		3,225
Acquisition of assets through assumption of debt and liabilities		—		265
Capitalized interest and real estate taxes related to construction in progress		95		137

See Notes to Consolidated Financial Statements

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)~~

~~FOR THE THREE AND NINE MONTHS ENDED~~ ~~SEPTEMBER 30, 2019~~ ~~(UNAUDITED)~~

Accumulated

Noncontrolling

Distributions

Total

Interest

Accumulated

Common

Paid-in

in Excess of

Beneficial

Operating

Partially Owned

Comprehensive

Shares

Capital

Earnings

Interest

Partnership

Properties

Income (Loss)

Total

(in thousands)
BALANCE AT DECEMBER 31, 2018

8,967

$ 122,624

$ (24,741)

$ 97,883

$ 183,360

$ 2,538

$ (30)

$ 283,751
Shares/units redeemed

(11)

(197)

-

(197)

(629)

-

-

(826)
Dividends declared

-

-

(2,374)

(2,374)

(4,661)

-

-

(7,035)
Dividends reinvested - stock dividend

82

1,479

-

1,479

-

-

-

1,479
Issuance of shares under optional purchase plan

49

929

-

929

-

-

-

929
Change in fair value of interest rate swaps

-

-

-

-

-

-

4

4
Net income

-

-

1,288

1,288

2,532

(30)

-

3,790
BALANCE AT MARCH 31, 2019

9,087

$ 124,835

$ (25,827)

$ 99,008

$ 180,602

$ 2,508

$ (26)

$ 282,092
Shares/units redeemed

(9)

(154)

-

(154)

(272)

-

-

(426)
Dividends declared

-

-

(2,407)

(2,407)

(4,657)

-

-

(7,064)
Dividends reinvested - stock dividend

86

1,554

-

1,554

-

-

-

1,554
Issuance of shares under optional purchase plan

42

795

-

795

-

-

-

795
Change in fair value of interest rate swaps

-

-

-

-

-

-

4

4
Net income

-

-

1,647

1,647

3,190

(16)

-

4,821
BALANCE AT JUNE 30, 2019

9,206

$ 127,030

$ (26,587)

$ 100,443

$ 178,863

$ 2,492

$ (22)

$ 281,776
Shares issued under trustee compensation plan

3

62

-

62

-

-

-

62
Shares/units redeemed

(13)

(242)

-

(242)

(79)

-

-

(321)
Dividends declared

-

-

(2,435)

(2,435)

(4,655)

-

-

(7,090)
Dividends reinvested - stock dividend

87

1,558

-

1,558

-

-

-

1,558
Issuance of shares under optional purchase plan

36

687

-

687

-

-

-

687
UPREIT units converted to REIT common shares

1

28

-

28

(28)

-

-

-
Change in fair value of interest rate swaps

-

-

-

-

-

-

6

6
Net income

-

-

1,213

1,213

2,312

(55)

-

3,470
BALANCE AT SEPTEMBER 30, 2019

9,320

$ 129,123

$ (27,809)

$ 101,314

$ 176,413

$ 2,437

$ (16)

$ 280,148

~~See Notes to Consolidated Financial Statements~~

~~Table of Contents~~7

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOW~~S

~~FOR THE NINE MONTHS ENDED~~ ~~September 30, 2020 and 2019~~ ~~(UNAUDITED)~~

Nine Months Ended

September 30,

2020

2019

(in thousands)
OPERATING ACTIVITIES

Net income

$
16,890

$
12,081
Adjustments to reconcile net income to net cash from operating activities

Gain on sale of real estate investments

(1,456)

—
Gain on involuntary conversion

(52)

487
Equity in income of unconsolidated affiliates

(363)

(629)
Distributions of earnings of unconsolidated affiliates

363

629
Allowance for uncollectible accounts receivable

52

125
Depreciation

14,716

14,785
Amortization

1,095

1,390
Amortization of debt issuance costs

463

465
Effects on operating cash flows due to changes in

��
Other assets

2,389

1,908
Tenant security deposits payable

380

150
Accrued expenses and other liabilities

1,511

2,624
NET CASH PROVIDED BY OPERATING ACTIVITIES

35,988

34,015
INVESTING ACTIVITIES

Purchase of real estate investment properties

(8,397)

—
Capital expenditures and tenant improvements

(24,662)

(8,935)
Proceeds from sale of real estate investments and non-real estate investments

5,483

—
Proceeds from involuntary conversion

1,077

1,513
Investment in unconsolidated affiliates

(1,170)

(1,323)
Distributions in excess of earnings received from unconsolidated affiliates

239

(32)
Notes receivable issued

(743)

(1,106)
NET CASH USED IN INVESTING ACTIVITIES

(28,173)

(9,883)
FINANCING ACTIVITIES

Payments for financing, debt issuance and lease costs

(349)

(27)
Payments on investment certificates and subordinated debt

(50)

—
Principal payments on special assessments payable

(290)

(245)
Proceeds from issuance of mortgage notes payable and subordinated debt

22,910

—
Principal payments on mortgage notes payable

(15,249)

(16,330)
Proceeds from issuance of shares under optional purchase plan

2,579

2,411
Shares/units redeemed

(2,786)

(1,573)
Dividends/distributions paid

(17,012)

(16,333)
NET CASH USED IN FINANCING ACTIVITIES

(10,247)

(32,097)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS

(2,432)

(7,965)
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD

17,382

30,065
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

$
14,950

$
22,100

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

Cash and cash equivalents

$
6,499

$
13,685
Restricted deposits

8,451

8,415
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD

$
14,950

$
22,100

~~See Notes to Consolidated Financial Statements~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~

~~FOR THE NINE MONTHS ENDED~~ ~~September 30, 2020 and 2019~~ ~~(UNAUDITED)~~

Nine Months Ended

September 30,

2020

2019

(in thousands)
SCHEDULE OF CASH FLOW INFORMATION

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

$
12,381

$
13,417

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Dividends reinvested

$
4,836

$
4,591
Dividends declared and not paid

2,577

2,435
UPREIT distributions declared and not paid

4,825

4,655
UPREIT units converted to REIT common shares

—

28
Shares issued pursuant to trustee compensation plan

64

62
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT

9,031

—
Increase in land improvements due to increase in special assessments payable

72

213
Unrealized (loss) gain on interest rate swaps

(2,125)

14
Acquisition of assets with new financing

3,225

—
Acquisition of assets through assumption of debt and liabilities

538

—
Capitalized interest and real estate taxes related to construction in progress

524

55

~~See Notes to Consolidated Financial Statements~~

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

Note 1 - Organization

Sterling Real Estate Trust, d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in 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.Code.

Sterling previously established an operating partnership (“Sterling Properties, ~~LLLP”~~LLLP or the Operating Partnership”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, ~~of Sterling Properties, LLLP,~~ Sterling has management responsibility for all activities of the operating partnership. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, Sterling owned approximately ~~34.82%~~35.35% and ~~34.63%~~35.03%, respectively, of the operating partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2019,~~2020, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2020 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 2020 and 2019, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three ~~and nine~~ months ended ~~September 30, 2020 and 2019.~~March 31, 2021. These adjustments are of a normal recurring nature.

Principles of Consolidation

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

As of March 31, 2021 the Trust owned approximately 35.35% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the partnership agreement, these persons have the right to tender their OP Units for redemption to the Operating Partnership at any time following a specified restricted period for cash equal to the fair value of an equivalent number of common shares of the Trust. In lieu of delivering cash, however, the Trust, as the Operating Partnership’s general partner, may, at its option, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Trust so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Trust’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Trust issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Trust an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE. The Trust will consolidate the operations of a joint venture if the Trust determines that it is either the primary beneficiary of a variable interest entity (VIE) or has substantial influence and control of the entity. In instances where the Trust determines that it is not the primary beneficiary of a VIE or the Trust does not control the joint venture but can exercise influence over the entity with respect to its operations and major decisions, the Trust will use the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Trust’s operations but instead its share of operations will be reflected as equity in earnings (loss) of unconsolidated entity on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated entity on the consolidated balance sheets.

~~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)~~

~~Principal Business Activity~~

~~Sterling~~ ~~currently owns directly and indirectly 179 properties.~~The Operating Partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s ~~132 residential properties are located~~sole significant asset is its investment in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 47 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently,the Operating Partnership. As a result, substantially all of the Trust’s ~~mix~~assets and liabilities represent those assets and liabilities of ~~properties~~the Operating Partnership. All of the Trust’s debt is ~~73.7% residential~~an obligation of the Operating Partnership, and 26.3% commercial (based on cost) and total $682,862 in real estate investments at September 30, 2020. Sterling’s current acquisition strategy and primary focus is on multifamily apartment properties. We currently have no plans to actively market our existing commercial properties for sale. We will consider unsolicited offers for purchasethe Trust guarantees the unsecured debt obligations of ~~non-multifamily properties on a case by case basis.~~the Operating Partnership.

Residential Property

Location

No. of Properties

Units

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

North Dakota

21

826,000

Arkansas

2

28,000

Colorado

1

17,000

Iowa

1

33,000

Louisiana

1

15,000

Michigan

1

12,000

Minnesota

13

664,000

Mississippi

1

15,000

Nebraska

1

19,000

Wisconsin

5

63,000

47

1,692,000

Concentration of Credit Risk

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

Use of Estimates

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

Real Estate Investments

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

~~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)~~

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

For tangible assets acquired, including land, building and other improvements, the Trust considers available comparable market and industry information in estimating acquisition date fair ~~value on the acquisition date.~~value. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

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

The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Trust incurred amortization expense pertaining to acquired in-place lease value intangibles of $313 and $401 for the three months ended September 30, 2020 and 2019, respectively and $970 and $1,249 for the nine months ended September 30, 2020 and 2019, respectively.

The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $47 and $54 for the three months ended September 30, 2020 and 2019, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $54 and $65 for the three months ended September 30, 2020 and 2019, respectively, was recorded as an increase to real estate rental income. Amortization pertaining to above market lease intangibles of $147 and $160 for the nine months ended September 30, 2020 and 2019, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $163 and $198 for the nine months ended September 30, 2020 and 2019, respectively, was recorded as an increase to real estate rental income.

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

~~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)~~

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


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

Depreciation expense for the three months ended September 30, 2020 and 2019 totaled $4,961 and $4,879, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 totaled $14,716 and $14,785, respectively.

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

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

●

~~a substantial decline or continued low occupancy rate;~~

●

~~continued difficulty in leasing space;~~

●

~~significant financially troubled tenants;~~

●

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

●

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

●

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

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

●

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

●

~~projected capital expenditures and lease origination costs;~~

●

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

●

~~comparable selling prices; and~~

●

~~property specific discount rates for fair value estimates as necessary.~~

To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. ThereBased on evaluation, there were 0 impairment losses during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

~~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)~~

Properties Held for Sale

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

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

●

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

●

~~the asset is available for immediate sale in its present condition subject only to terms that are usual~~March 31, 2021 and ~~customary for sales of such assets;~~

●

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

●

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

●

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

●

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

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

~~There were 0 properties classified as held for sale at September 30, 2020 or at~~ December 31, ~~2019.~~2020. See Note 18.

Construction in Progress

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

Construction in progress as of September 30, 2020 consists primarily of development and planning costs associated with the Goldmark Office Park building located in Fargo, North Dakota, the Montreal Courts Apartment located in Little Canada, Minnesota and the Bayview Apartments located in Fargo, North Dakota. The 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 and additional amenities will be completed in phases with the primary phase completed in the fourth quarter of 2020. The current project budget is approximately $6,790 of which $6,718 has been incurred and is included in construction in progress. The Montreal Courts 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 2020 and the current project budget approximates $1,893 of which $1,152 has been incurred and is included in construction in progress.

~~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)~~

As of September 30, 2020, the development project at the Glen Pond Apartments located in Eagan, Minnesota, was completed, and the development was put into service. Final cost of the development was $16,540.

~~Cash, Cash Equivalents and Restricted Deposits~~

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents. Restricted deposits include funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrow and escrow deposits required by lenders on certain properties to be used for future building renovations or tenant improvements and potential Internal Revenue Code Section 1031 tax deferred exchanges (1031 Exchange).

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ~~FASB~~ ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings ~~contributions~~ and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ~~FASB~~ ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. NaN impairment losses were recorded ~~related~~ to ~~the~~ unconsolidated affiliates for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

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

In determining whether an investment in a limited liability company or tenant in common ~~arrangement~~ is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns. ~~As of September 30, 2020, our tenant~~See Note 5, Investment in ~~common arrangements do not qualify as variable interest entities and do not meet the control requirements~~Unconsolidated Affilliates, for consolidation, as defined in ASC 810. As of September 30, 2020, our investment in the joint ventures do not qualify as variable interest entities, as they do not meet the control requirements for consolidation or significant influence requirements, as defined in ASC 810, and do meet the definition of joint ventures.

~~As of September 30, 2020 and December 31, 2019, the unconsolidated affiliates held total assets of $49,125 and $31,261 and mortgage notes payable of $29,072 and $16,690, respectively.~~

The operating partnership is a 50% owner of a retail center as a tenant in common through 100% ownership in a limited liability company. The retail center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2020 and December 31, 2019 of $10,095 and $10,264, respectively. The Trust is jointly and severally liable for the full mortgage balance.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2020 and December 31, 2019 of $6,282 and $6,426, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 60% interest in a limited liability company that is developing a 190 unit multifamily property in Savage, Minnesota. The property is encumbered by a first construction mortgage with a balance at September 30, 2020 of $11,030 and 0 mortgage balance at December 31, 2019. The operating partnership has contributed $3,305 in cash as of September 30, 2020. The limited liability company holds total assets of $19,528. The Trust is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 60% interest in a limited liability company that intends to develop a 160 unit multifamily property in Maple Grove, Minnesota. The property is encumbered by a first construction mortgage with a balance at September 30, 2020 of $1,665 and 0 mortgage balance at December 31, 2019. The operating partnership has contributed $3,098 in cash as of September 30, 2020. The limited liability company holds land located in Maple Grove, Minnesota, total assets of $7,668. The Trust is jointly and severally liable for the full mortgage balance.

~~Receivables~~

Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, the operating partnership recognizes an adjustment to rental income.

~~Notes receivable are issued periodically and are secured and interest bearing.~~

~~Financing and Lease Costs~~

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

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

~~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)~~

~~Debt Issuance Costs~~

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

~~Lease Intangible Assets~~

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

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined 0 impairment charges were necessary at September 30, 2020 and December 31, 2019.further information.

Noncontrolling Interest

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

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

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

~~Syndication Costs~~

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

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid.

~~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)~~

A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are generally taxed on REIT distributions of ordinary income in ~~generally~~ the same manner as they are taxed on other corporate distributions.

We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, 0 provisions or liabilities for income taxes have been recorded in the financial statements.

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP. The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners11

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

We follow ~~FASB~~ ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before ~~2016.~~

~~The operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.~~2017.

Revenue Recognition

The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of ~~September 30, 2020,~~March 31, 2021, all leases analyzed under the Trust’s lease classification process were determined to be operating leases.

As of September 30, 2020, we derived approximately 80% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of September 30, 2020, we derived approximately 20% of our revenues from commercial leases primarily under long-term lease agreements. Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

We recognize variable income from pass-through expenses on an accrual basis over the periods in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expenses and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within ~~“Operating~~operating expenses,

~~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)~~

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~~increased revenue by ~~$31 and $39~~$105 for the three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019, respectively. The straight-line rent adjustment~~ decreased revenue by ~~$169 and increased revenue by $17~~$65 for the ~~nine~~three months ended ~~September 30, 2020 and 2019, respectively.~~March 31, 2020. The straight-line receivable balance included in ~~receivables~~other assets on the consolidated balance sheets as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$2,982~~$3,117 and ~~$3,331,~~$3,012, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which ~~generally~~ are immaterial, are recognized in the subsequent year.

Upon adoption of ASU 2016-02 on January 1, 2019, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease component is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental 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 Trust’s operating leases is comprised of the following:~~

Three months ended September 30, 2020


Residential

Commercial

Total

(in thousands)
Lease income related to fixed lease payments

$
24,080

$
4,630

$
28,710
Lease income related to variable lease payments

—

1,352

1,352
Other (a)

(170)

(36)

(206)
Lease Income (b)

$
23,910

$
5,946

$
29,856

Three months ended September 30, 2019


Residential

Commercial

Total

(in thousands)
Lease income related to fixed lease payments

$
23,064

$
4,969

$
28,033
Lease income related to variable lease payments

—

1,531

1,531
Other (a)

(301)

(27)

(328)
Lease Income (b)

$
22,763

$
6,473

$
29,236

~~(a)~~

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

~~(b)~~

~~Excludes other rental income for the three months ended September 30, 2020 and 2019 of $1,010 and $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 September 30, 2020, non-cancelable in place commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.

Years ending December 31,

Amount

(in thousands)
2020 (October 1, 2020 - December 31, 2020)

$
4,408
2021

16,698
2022

14,170
2023

12,426
2024

11,666
Thereafter

59,879

$
119,247

~~Business Interruption Proceeds~~

In the Trust’s normal course of business we periodically receive insurance recoveries for business interruption. The Trust received insurance recoveries for business interruption of $521 and $768 during the nine months ended September 30, 2020 and 2019. When insurance proceeds are received they are reflected in the statement of operations as real estate rental income.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had 0 dilutive potential common shares as of ~~September 30,~~March 31, 2021 and 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 ~~September 30,~~March 31, 2021 and 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 ~~9,638,000~~9,983,000 and ~~9,208,000,~~9,562,000, respectively.

~~Incurred but Not Reported Insurance Liability~~

The Trust maintains a business insurance program with deductible limits, which covers property, business automobile and general liability claims. The Trust accrues estimated losses using a reserve for known claims and estimates based on historical loss experience. The calculations used to estimate property claim reserves are based on numerous assumptions, some of which are subjective. The Trust will adjust the property claim reserves, if necessary, in the event future loss experience differs from historical loss patterns. As of September 30, 2020 and December 31, 2019, property claim reserves were $1,084 and $204, respectively, and are included in accrued expenses and other liabilities on the consolidated balance sheet.

Reclassifications

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

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The standard provides for optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

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.~~2023. 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.

WeTrust adopted this standard effective as of January 1, ~~2019, using the optional transition method to apply the standard as of the effective date. The 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 Trust elected the practical expedient to combine lease and nonlease components for leases as lessor. Finally, the 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 Trust determined that for leases as lessor, as of January 1, 2019, there was no impact on lease revenue or related expenses.

2019. In April 2020, the FASB met to discuss lease modifications guidance in Topic 842 as it relates to lease concessions amidst the ~~COVID-19~~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~~leases 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~~Covid-19 pandemic as it relates to the Trust’s residential leases, as the cash flows related to these concessions and deferrals do not cause a significant change in the cash received from the leases.

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

NOTE 3 – segment reporting

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

~~Segment Revenues and Net Operating Income~~

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

2113

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (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 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 months ended March 31, 2021 and 2020, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.


	Three months ended March 31, 2021						Three months ended March 31, 2020
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Income from rental operations	$	25,959	$	5,801	$	31,760	$	23,995	$	5,911	$	29,906
Expenses from rental operations		13,847		1,504		15,351		13,912		1,787		15,699
Net operating income	$	12,112	$	4,297	$	16,409	$	10,083	$	4,124	$	14,207
Depreciation and amortization						5,328						5,252
Interest						4,287						4,350
Administration of REIT						1,201						1,162
Other income						(243)						(1,784)
Net income					$	5,836					$	5,227

Segment Assets and Accumulated Depreciation


As of September 30, 2020	Residential		Commercial		Total
As of March 31, 2021							Residential		Commercial		Total

	(in thousands)						(in thousands)
Real estate investments	$	637,741	$	204,275	$	842,016	$	647,519	$	200,571	$	848,090
Accumulated depreciation		(114,955)		(44,199)		(159,154)		(122,143)		(43,057)		(165,200)
	$	522,786	$	160,076		682,862	$	525,376	$	157,514		682,890
Cash and cash equivalents						6,499						13,888
Restricted deposits and funded reserves						8,451						16,459
Investment in unconsolidated affiliates						8,846						11,664
Note receivable						2,043						2,009
Assets held for sale												830
Intangible assets, less accumulated amortization						7,671						7,075
Other assets, net						7,049						10,449
Total Assets					$	723,421					$	745,264

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, 2020	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	647,083	$	198,205	$	845,288
Accumulated depreciation		(118,363)		(42,212)		(160,575)
	$	528,720	$	155,993		684,713
Cash and cash equivalents						11,716
Restricted deposits and funded reserves						15,919
Investment in unconsolidated affiliates						9,659
Note receivable						2,026
Assets held for sale						831
Intangible assets, less accumulated amortization						7,367
Other assets, net						10,798
Total Assets					$	743,029

2214

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

NOTE 4 – restricted deposits and funded reserves


	As of March 31,		As of December 31,
	2021		2020

	(in thousands)
Tenant security deposits	$	4,885	$	4,730
Real estate tax and insurance escrows		1,158		2,058
Replacement reserves		2,094		2,137
Other funded reserves		8,322		6,994
	$	16,459	$	15,919

Tenant Security Deposits

We have set aside funds to repay tenant security deposits upon tenant move-out.

Real Estate Tax and Insurance Escrows

Pursuant to the terms of certain mortgages, we have established and maintain real estate tax escrows and insurance escrows to pay real estate taxes and insurance. We are required to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums.

Replacement Reserves

Pursuant to the terms of certain mortgages, we have established and maintain several replacement reserve accounts. We make monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals.

Other Funded Reserves

Other funded reserves consist of proceeds received on the disposal of a commercial building located in Bismarck, North Dakota. The proceeds are required to be held as restricted funds under Section 1031 of the Internal Revenue Code (like-kind exchange).

Additionally, insurance proceeds of $1,324 that were received during the three months ended March 31, 2021, are held in an escrow account per the agreement set in place with the lender of the property. Funds will be released as construction costs related to the insurance claim are incurred.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 5 – INVESTMENT IN UNCONSOLIDATED AFFILIATES

The Company’s investments in unconsolidated real estate ventures, are summarized as follows (in thousands):


Unconsolidated Affiliates	Date Acquired	Trust Ownership Interest		Total Investment in Unconsolidated Affiliates
Banner Building	2007	66.67%	$	59
Grand Forks Market Place Retail Center	2003	50%		2,429
SE Savage, LLC	2019	60%		3,168
SE Maple Grove, LLC	2019	60%		2,942
SE Rogers, LLC	2020	60%		3,066
			$	11,664

The Operating Partnership is a 50% owner of Grand Forks Marketplace Retail Center as a tenant in common through 100% ownership in a limited liability company. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at March 31, 2021 and December 31, 2020 of $9,975 and $10,036, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership is a 66.67% owner of Banner Building as a tenant in common. The office building has approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $6,181 and $6,232, respectively. The Trust is jointly and severally liable for the full mortgage balance.

Based upon the facts and circumstances at formation of the tenant in common investments, the Trust determined that they are not VIEs. As a result, the Trust used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate the tenants in common and joint ventures. Based upon each member's substantive participating rights over the activities of each entity as stipulated in the operating agreements, the tenants in common are not consolidated by the Trust and are accounted for under the equity method of accounting. The Trust’s investments in the tenants in common are included in Investment in unconsolidated affiliates, at equity, on the Trust’s consolidated balance sheets and the Trust’s earnings from its investments in the unconsolidated affiliates are presented in Equity in earnings (losses) of real estate investments on the Trust’s consolidated statements of operations.

The LLC interests discussed below are deemed to be variable interests in VIEs and, based on an evaluation of the variable interests against the criteria for consolidation, the Trust determined that it is not the primary beneficiary of the investments, as the Trust does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIEs is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Trust’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the operating agreements. The Trust's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.

The Operating Partnership owns a 60% interest in a limited liability company that is currently developing a 190-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $2,077 in cash to SE Savage. SE Savage is located in Savage, Minnesota, with total assets of $32,133 and $27,015 as of March 31, 2021 and December 31, 2020, respectively. Current expectations are that the project will be completed in the fourth quarter of 2021 and the current

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

project budget approximates $37,800 of which $29,117 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $24,786 and $19,436, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company that is currently developing a 160-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $2,975 in cash to SE Maple Grove. SE Maple Grove is located in Maple Grove, Minnesota, with total assets of $18,331 and $13,106 as of March 31, 2021 and December 31, 2020. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $33,000 of which $16,242 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $11,335 and $5,710, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company that intends to develop a 165-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $3,089 in cash to SE Rogers. SE Rogers holds land located in Rogers, Minnesota, with total assets of $5,761 and $4,161 as of March 31, 2021 and December 31, 2020, respectively. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $34,300 of which $5,478 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage that has 0 balance at March 31, 2021 and December 31, 2020. The Company is jointly and severally liable for the full mortgage balance.

The amounts reflected in the following table are based on the historical financial information of the unconsolidated affiliates.

The following is a summary of the financial position of the unconsolidated affiliates as of March 31, 2021 and December 31, 2020.


	March 31, 2021		December 31, 2020

	(in thousands)
ASSETS
Real estate investments	$	86,983	$	74,991
Accumulated depreciation		(9,939)		(9,692)
		77,044		65,299
Cash and cash equivalents		282		249
Restricted deposits and funded reserves		192		384
Other assets, net		296		180
Total Assets	$	77,814	$	66,112

LIABILITIES
Mortgage notes payable, net	$	51,016	$	41,405
Tenant security deposits payable		17		2
Accrued expenses and other liabilities		6,543		6,533
Total Liabilities	$	57,576	$	47,940
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	20,238	$	18,172

	$	77,814	$	66,112

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

The following is a summary of results of operations of the unconsolidated affiliates for the three months ended March 31, 2021 and 2020.


	Three months ended March 31,
	2021		2020

	(in thousands)
Income from rental operations	$	880	$	963
Expenses from rental operations		234		259
Net operating income	$	646	$	704
Depreciation and Amortization		247		171
Interest		417		244
Net (loss) income	$	(18)	$	289

NOTE 46 - 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		Lease		Accumulated		Lease
As of September 30, 2020	Intangibles		Amortization		Intangibles, net
As of March 31, 2021							Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	20,197	$	(13,891)	$	6,306	$	18,965	$	(13,177)	$	5,788
Above-market leases		2,619		(1,254)		1,365		2,617		(1,330)		1,287
	$	22,816	$	(15,145)	$	7,671	$	21,582	$	(14,507)	$	7,075
Lease Intangible Liabilities
Below-market leases	$	(3,031)	$	1,987	$	(1,044)	$	(2,881)	$	1,934	$	(947)


	Lease		Accumulated		Lease		Lease		Accumulated		Lease
As of December 31, 2019	Intangibles		Amortization		Intangibles, net
As of December 31, 2020							Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	21,480	$	(14,051)	$	7,429	$	19,768	$	(13,727)	$	6,041
Above-market leases		3,211		(1,507)		1,704		2,618		(1,292)		1,326
	$	24,691	$	(15,558)	$	9,133	$	22,386	$	(15,019)	$	7,367
Lease Intangible Liabilities
Below-market leases	$	(3,088)	$	1,881	$	(1,207)	$	(2,957)	$	1,963	$	(994)

~~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 (October 1, 2020 - December 31, 2020)

$
304

$
49
2021

1,121

184
2022

987

164
2023

849

151
2024

849

151
Thereafter

3,561

345

$
7,671

$
1,044

~~The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 2020 was 6.7 years.~~

~~NOTE 5 – LINES OF CREDIT~~

~~We have a $18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in~~ ~~June 2021; a $4,915 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires in~~ ~~June 2022; a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires~~ ~~June 2022; and a $3,200 variable rate (LIBOR plus 2.04%) line of credit agreement with Bank of the West, which expires~~ ~~November 2020~~. The lines of credit are secured by properties in Duluth, Edina, Moorhead, Minnesota; and Bismarck, Dickinson, Grand Forks and Fargo, North Dakota. At September 30, 2020, the Bremer line of credit secured 2 letters of credit totaling $1,216, leaving $30,199 available and unused under the agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

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


	Intangible		Intangible
Years ending December 31,	Assets		Liabilities

	(in thousands)
2021 (April 1, 2021 - December 31, 2021)	$	829	$	137
2022		987		164
2023		849		151
2024		849		151
2025		849		151
Thereafter		2,712		193
	$	7,075	$	947

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of March 31, 2021 was 7.2 years.

When acquiring property, the portion of the purchase price allocated to in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Trust incurred amortization expense pertaining to acquired in-place lease value intangibles of $253 and $341 for the three months ended March 31, 2021 and 2020, respectively.

When acquiring property, the portion of the purchase price allocated to above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $39 and $52 for the three months ended March 31, 2021 and 2020, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $47 and $56 for the three months ended March 31, 2021 and 2020, respectively, was recorded as an increase to real estate rental income.

NOTE 7 – 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; a $4,915 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires in June 2022; and a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires June 2022. The lines of credit are secured by specific properties. At March 31, 2021, the $4,915 variable rate line of credit with Bremer Bank secured 2 letters of credit totaling $746, leaving $27,469 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances.

Certain line of credit agreements ~~includes~~include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ~~ratios on an annual and semi-annual basis. As of September 30, 2020, we were in~~ratios. We are not required to determine compliance with all ~~measured debt covenants. As~~covenants as of ~~December~~March 31, ~~2019, 3 residential properties were out~~2021; however, we have not received any notice of ~~compliance~~non-compliance with ~~Bremer’s debt service coverage ratio requirement on an individual property basis. An annual waiver was received from~~our covenants through the ~~lender.~~date of this filing.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 68 - MORTGAGE NOTES PAYABLE

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


	Principal Balance At				Principal Balance At
	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
Fixed rate mortgage notes payable (a)	$	405,924	$	395,038	$	419,700	$	415,665
Variable rate mortgage notes payable						7,368		7,446
Mortgage notes payable						427,068		423,111
Less unamortized debt issuance costs		1,810		1,874		1,904		1,833
	$	404,114	$	393,164	$	425,164	$	421,278

(a)	Includes ~~$31,017~~$43,408 and ~~$12,960~~$43,613 of variable rate mortgage debt that was swapped to a fixed rate at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

As of ~~September 30, 2020,~~March 31, 2021, we had ~~119~~107 fixed rate and 2 variable rate mortgage loans with effective interest rates ranging from ~~2.43%~~2.11% to 6.85% per annum and a weighted average effective interest rate of ~~4.13%~~4.01% per ~~annum.~~annum on fixed rate loans and 2.25% per annum on variable rate loans.

As of December 31, ~~2019,~~2020, we had ~~121~~114 fixed rate and 2 variable rate mortgage loans with effective interest rates ranging from ~~3.15%~~2.14% to ~~7.25%~~6.85% per annum, and a weighted average effective interest rate of ~~4.31%~~4.03% per ~~annum.~~annum on fixed rate loans and 2.28% per annum on variable rate loans.

The majority of the 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.

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. We are not required to determine compliance with ~~our~~all covenants as of ~~September 30, 2020;~~March 31, 2021; however, we have not received any notice of non-compliance with our covenants through the date of this filing. As of December 31, 2019, 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 were received from the lenders on $10,435 of the loans out of compliance. Annual waivers were not received from 1 lender on loans with a balance of $5,926. The Trust elected to pay the loans off in March 2020 with no penalty.

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~~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)		(in thousands)
2020 (October 1, 2020 - December 31, 2020)	$	8,126
2021		27,580
2021 (April 1, 2021 - December 31, 2021)			$	15,835
2022		25,841		27,109
2023		49,115		50,417
2024		18,076		19,421
2025				51,057
Thereafter		277,186		263,229
Total payments	$	405,924	$	427,068

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 79 – 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 ~~September 30, 2020,~~March 31, 2021, the Trust used 89 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 ~~three~~nine months, the Trust estimates that an additional ~~$93~~$269 will be reclassified as ~~an increase to~~a interest expense.

The following table summarizes the Trust’s interest rate swaps as of ~~September 30, 2020,~~March 31, 2021, 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
November 1, 2019	$	7,026	3.15%	November 1, 2029	$	6,928	3.15%	November 1, 2029
November 1, 2019	$	4,881	3.28%	November 1, 2029	$	4,814	3.28%	November 1, 2029
January 10, 2020	$	3,171	3.39%	January 10, 2030	$	3,130	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 11, 2020					$	1,568	3.07%	June 15, 2030
June 11, 2020					$	3,039	3.07%	June 15, 2030
June 15, 2020	$	1,724	2.94%	June 15, 2030	$	1,700	2.94%	June 15, 2030
June 15, 2020	$	4,561	2.94%	June 15, 2030	$	4,498	2.94%	June 15, 2030
July 1, 2020	$	4,983	2.79%	June 10, 2030	$	4,931	2.79%	June 10, 2030
December 2, 2020					$	12,800	2.91%	December 2, 2027

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	September 30, 2020	December 31, 2019		September 30, 2020		December 31, 2019	March 31, 2021	December 31, 2020		March 31, 2021		December 31, 2020
Interest rate swaps	8	3	$	31,017	$	12,960	9	9	$	43,408	$	43,613

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 89 to the consolidated financial statements.


	Derivatives
Derivatives designated as	March 31, 2021			December 31, 2020
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	921	Other assets, net	$	—
Interest rate swaps	Accrued expenses and other liabilities	$	342	Accrued expenses and other liabilities	$	1,805

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 an asset and liability for the fair value of the future net payments

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (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 ~~Trust’s~~Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:



			Location of Gain					Location of Gain
		Amount of (Gain)/Loss	Reclassified from		Amount of (Gain)/Loss		Amount of (Gain)/Loss	Reclassified from		Amount of (Gain)/Loss
Derivatives in		Recognized in Other	Accumulated other		Reclassified from		Recognized in Other	Accumulated other		Reclassified from
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		AOCI into Income		Comprehensive Income	Comprehensive Income		AOCI into Income
Relationships		on Derivatives	(AOCI) into Income		Nine Months Ended		on Derivatives	(AOCI) into Income		Three Months Ended
		2020			2020		2021			2021
Interest rate swaps	$	2,125	Interest expense	$	145	$	(2,384)	Interest expense	$	115
		2019			2019		2020			2020
Interest rate swaps	$	(14)	Interest expense	$	22	$	1,486	Interest expense	$	10

Credit-risk-related Contingent Features

The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Trust could also be declared in default on its corresponding derivative obligation.

The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of ~~September 30, 2020,~~March 31, 2021, the termination value of derivatives in a liability position ~~which includes accrued interest and adjustment for non-performance risk, which the Trust has deemed not significant,~~ was ~~$2,088.~~$342. As of ~~September 30, 2020,~~March 31, 2021, the Trust has pledged the properties related to the loans which are hedged as collateral. ~~As of September 30, 2020, if the Trust had breached any of these provisions it could have been required to settle its obligations under the agreements at their termination value of $2,088~~.

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~~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 810 - FAIR VALUE MEASUREMENT

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


	September 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Carrying				Carrying				Carrying				Carrying
	Value		Fair Value		Value		Fair Value		Value		Fair Value		Value		Fair Value

	(in thousands)								(in thousands)
Financial assets:
Note receivable	$	2,043	$	2,156	$	1,300	$	1,389	$	2,009	$	2,091	$	2,026	$	2,117
Derivative assets	$	—	$	—	$	58	$	58	$	921	$	921	$	—	$	—

Financial liabilities:
Mortgage notes payable, net	$	404,114	$	439,341	$	393,164	$	415,183
Mortgage notes payable									$	427,069	$	451,910	$	423,111	$	443,100
Derivative liabilities	$	2,088	$	2,088	$	21	$	21	$	342	$	342	$	1,805	$	1,805

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

ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.

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

●

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

●

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

●

Level 3 – Instruments whose significant inputs are unobservable.

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

Recurring Fair Value Measurements

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


	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

	(in thousands)								(in thousands)
September 30, 2020
Derivative liabilities	$	—	$	2,088	$	—	$	2,088
December 31, 2019
March 31, 2021
Derivative assets	$	—	$	58	$		$	58	$	—	$	921	$	—	$	921
Derivative liabilities	$	—	$	21	$	—	$	21	$	—	$	342	$	—	$	342

December 31, 2020
Derivative liabilities									$	—	$	1,805	$	—	$	1,805

Derivatives: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative.

The Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (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 September 30, 2020 and December 31, 2019, the 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 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 Trust has considered any applicable credit enhancements. The Trust’s derivative instruments are further described in Note 7.

Fair Value Disclosures

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


	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

	(in thousands)								(in thousands)
September 30, 2020
March 31, 2021
Mortgage notes payable, net	$	—	$	—	$	439,341	$	439,341	$	—	$	—	$	451,910	$	451,910
Note receivable	$	—	$	—	$	2,156	$	2,156	$	—	$	—	$	2,091	$	2,091
December 31, 2019
December 31, 2020
Mortgage notes payable, net	$	—	$	—	$	415,183	$	415,183	$	—	$	—	$	443,100	$	443,100
Note receivable	$	—	$	—	$	1,389	$	1,389	$	—	$	—	$	2,117	$	2,117

Mortgage notes payable: The ~~Trust~~Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the ~~Trust~~Company for similar debt instruments of comparable maturities by the ~~Trust’s~~Company’s lenders. Judgment is used in determining the appropriate rate for each of the 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 3.05% to ~~3.20%~~3.15% and from ~~3.75%~~3.25% to ~~3.80%~~3.35% at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The fair value of the 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 September 30, 2020 and December 31, 2019. The Trust’s mortgage notes payable are further described in Note 6.

Notes ~~receivable:~~receivable. The Trust estimates the fair value of its notes receivable by discounting ~~the~~ future cash flows of each ~~note~~instrument at rates currently offered to the Trust for ~~debt instruments. Judgment is used in determining the appropriate rate for each~~similar note instruments of comparable maturities by 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.~~lenders. The rates used range from 3.05% to ~~3.20%~~3.15% and from ~~3.75%~~3.25% to ~~3.80%~~3.35% at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

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~~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 911 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, outstanding limited partnership units totaled ~~18,229,000~~18,246,000 and ~~17,811,000~~18,279,000, respectively. ~~For~~Total aggregate distributions per unit were $0.2650 and $0.2647 during the three months ended ~~September 30,~~March 31, 2021 and 2020, respectively. As of March 31, 2021 and ~~2019,~~2020, the ~~operating partnership~~Operating Partnership declared first quarter distributions of ~~$4,825~~$4,835 and ~~$4,655~~$4,831, respectively, to limited partners ~~which were~~ paid on ~~October~~April 15, 2021 and 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 ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, there were 0 limited partnership units exchanged for common shares pursuant to redemption requests.

At the sole and absolute discretion of the Trust as general partner of the limited partnership, and so long as our redemption plans ~~exist,~~exists and applicable holding periods are met, Limited Partners may request the ~~operating partnership~~Operating Partnership redeem their limited partnership units. The ~~operating~~Trust as general partner on behalf of the limited partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, ~~(2)~~or (ii) offer shares in lieu of cash for the redemption on a basis of 1one limited partnership unit for ~~one~~1 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

NOTE 1012 – 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~~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 $40,000 worth of securities. Currently, the fixed redemption price is ~~$18.25~~$19.00 per share or unit under the plans, which price became effective January 1, ~~2020.~~2021. Prior to January 1, ~~2020,~~2021 the redemption price was ~~$18.00~~$18.25 per share or unit under the plan.

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

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, the Company redeemed 41,000 and ~~2019, the Trust redeemed 101,000 and 33,000~~38,000 common shares valued at ~~$1,853~~$777 and ~~$593,~~$696, respectively. In addition, during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Trust redeemed ~~52,000~~33,000 and ~~55,000~~30,000 units valued at ~~$933~~$628 and ~~$980,~~$541, respectively. The total amount remaining available under the plan as of March 31, 2021 is $5,920 worth of securities.

NOTE 1113 – BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were ~~9,737,000~~9,968,000 and ~~9,436,000~~9,855,000 common shares outstanding, respectively. We had 0 preferred shares outstanding as of either date.

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~~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 ~~$0.7941~~$0.2650 per share and ~~$0.7838~~$0.2647 per share for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. As of ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the ~~operating partnership~~Operating Partnership declared first quarter dividends of ~~$2,577~~$2,642 and ~~$2,435~~$2,527, respectively, to holders of common shares ~~which were~~ paid on ~~October~~April 15, 2021 and 2020, ~~and 2019,~~ respectively.

NOTE 1214 – 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 $20.00 and $19.25 ~~and $19.00~~ at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. See discussion of determination of estimated value in ~~Note 16.~~Management Discussion and Analysis.

Therefore, the purchase price per common share for dividend reinvestments was ~~$18.29~~$19.00 and ~~$18.05~~$18.29 and for additional optional cash purchases was $20.00 and $19.25 ~~and $19.00~~ at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, 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 ~~nine~~three months ended ~~September 30, 2020, 265,000~~March 31, 2021, 89,000 shares were issued pursuant to dividend reinvestments and ~~134,000~~65,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at ~~$4,836~~$1,686 and ~~$2,579~~$1,307 respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

In the ~~nine~~three months ended ~~September 30, 2019, 255,000~~March 31, 2020, 87,000 shares were issued pursuant to dividend reinvestments and ~~127,000~~62,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at ~~$4,591~~$1,584 and ~~$2,411~~$1,203, respectively.

NOTE 15 – LEASES

As of March 31, 2021, we derived 82% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related items such as parking, storage and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of March 31, 2021, we derived 18% of our revenues from commercial leases primarily under long-term lease agreements. Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

The Trust’s leases contain lease and non-lease components for utility reimbursement from our residents. We have elected to combine lease and non-lease components for all asset classes. The combined components are included in real estate rental income in our consolidated financial statements and are accounted for under ASC 842.

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


	Three months ended March 31, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	24,834	$	4,382	$	29,216
Lease income related to variable lease payments		—		1,094		1,094
Other (a)		(135)		294		159
Lease Income (b)	$	24,699	$	5,770	$	30,469


	Three months ended March 31, 2020
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	23,203	$	4,714	$	27,917
Lease income related to variable lease payments		—		1,261		1,261
Other (a)		(257)		(90)		(347)
Lease Income (b)	$	22,946	$	5,885	$	28,831

(a)

For the three months ended March 31, 2021 and 2020, “Other” is comprised of revenue adjustments related to changes in collectibility and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the three months ended March 31, 2021 and 2020 of $1,291 and $1,075, respectively, which is accounted for under the revenue recognition standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

As of March 31, 2021, non-cancelable commercial operating leases provide for future minimum rental income as follows. Apartment leases are not included as the terms are generally for one year or less.


Years ending December 31,	Amount
	(in thousands)
2021 (April 1, 2021 - December 31, 2021)	$	11,658
2022		14,789
2023		13,454
2024		12,737
2025		12,491
Thereafter		56,308
	$	121,437

NOTE 1316 – RELATED PARTY TRANSACTIONS

Effective January 1, 2021, Alloy Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC and GOLDMARK Property Management. In connection with this restructuring transaction, the owners of Alloy Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management. Alloy Enterprises, Inc. is owned in part by the Trust’s Chief Executive Officer and Trustee Mr. Kenneth P. Regan, by Trustee Mr. James S. Wieland, by President Joel Thomsen, by Chief Investment Officer, Ryan M. Downs, and by the Chief Financial Officer and Treasurer Erica J. Chaffee. In addition, Mr. Regan serves as the Executive Chairman of the Advisor, and Messrs. Wieland, Thomsen, and Downs and Ms. Chaffee serve on the Board of Governors of both the Advisor and GOLDMARK Property Management.

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

GOLDMARK Property Management, a North Dakota limited liability company formed in 1981. GOLDMARK Property Management performs property management services for the Trust.

We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. A family member of Erica J. Chaffee, our Chief Financial Officer, is an employee of Bell Bank and could have an indirect material interest in any such engagement and related transactions.

Property Management ~~Fees~~Fee

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we paid property management ~~fees~~ and administrative fees to GOLDMARK Property Management, Inc. ~~GOLDMARK Property Management is owned in part by Kenneth Regan, James Wieland and Joel Thomsen.~~ For the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we paid management fees, on-site staff costs and other miscellaneous fees required to run the property of ~~$9,518~~$3,064 and ~~$9,530,~~$3,311, respectively, to GOLDMARK Property Management, Inc. Management fees paid during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019,~~ approximated 5% of net collected rents. In addition, during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, we paid repair and ~~2019,~~maintenance expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling $1,696 and $1,627, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

~~we paid repair and maintenance related payroll and payroll related expenses to GOLDMARK Property Management totaling $4,849 and $4,664, respectively.~~

Board of Trustee Fees

We incurred Trustee fees of ~~$49~~$15 and ~~$44~~$20 during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019~~2020 we owed our Trustees ~~$14~~$42 and ~~$29~~$27 for unpaid board of trustee fees, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees a specific ~~amounts~~number of common shares 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 0 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,~~24, 2021, and is effective until March 31, ~~2021.~~2022.

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 nine months ended September 30, 2020 and 2019, we incurred advisory management fees of $2,321 and $2,244 with Sterling Management, LLC, our Advisor. As of September 30, 2020 and December 31, 2019, we owed our Advisor $262 and $503, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations. During the nine months ended September 30, 2020 and 2019, we reimbursed the Advisor for operating costs totaling $22 each period, respectively. As of September 30, 2020, we owed our Advisor $11 for unpaid operating costs.

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.

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

During the nine months ended September 30, 2020, we incurred acquisition fees of $500. During the nine months ended September 30, 2019 there were 0 acquisition fees incurred with our Advisor. See Note 16. There were 0 acquisition fees owed to our Advisor as of 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 nine months ended September 30, 2020, we incurred disposition fees of $143. During the nine months ended September 30, 2019, there were 0 disposition fees incurred with our Advisor. See Note 15. There were 0 disposition fees owed to our Advisor as of 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 nine months ended September 30, 2020 we incurred financing fees of $82 with our Advisor. During the nine months ended September 30, 2019, there were 0 financing fees incurred with our Advisor. As of September 30, 2020, we owed the advisor $2 for finance fees incurred. There were 0 financing fees owed to our Advisor as of December 31, 2019.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 and 2020 (UNAUDITED)

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

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~~If Advisor shares responsibility for providing Development Services with one or more third parties, Advisor’s set Development Fee shall be reduced by the ~~nine months ended September 30, 2020 we incurred development~~ fees charged by any such third parties; provided, such adjustment is subject to a 2.5% minimum Advisor’s Development Fee. Additionally, in cases where the Advisor is sharing responsibility for providing Development Services, the Development Fee shall be capped at 2.5% of $715 with our Advisor. During the nine months ended September 30, 2019, there were 0 development fees incurred with our Advisor. During the nine months ended September 30, 2020, our Advisor decided to forgo the $104 portion of held back development fees related to the Stonefield development project which was recognized as a reduction in building and improvements. As of September 30, 2020, there was $794 of development fees owed to our Advisor of which $79 is due to the 10% hold back with respect to the Glen Pond development project. As of December 31, 2019, we owed our Advisor a total of $104 for unpaid development fees, of which the entire amount was for unpaid development fees as part of a 10% hold back with respect to the Stonefield development project.$20,000,000 ($500,000).

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~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2020~~The below table summarizes the fees incurred and ~~2019~~ ~~(UNAUDITED)~~

~~(Dollar amounts in thousands, except share and per share data)~~payable to our Advisor.


	March 31, 2021		March 31, 2020		March 31, 2021		December 31, 2020
	Incurred		Incurred		Due and		Due and
	Fee		Fee		Payable		Payable

	(in thousands)
Fee:
Advisory	$	807	$	765	$	271	$	278
Acquisition	$	-	$	302	$	-	$	-
Disposition	$	-	$	92	$	-	$	175
Financing	$	43	$	25	$	38	$	-
Development	$	-	$	-	$	79	$	79
Project Management	$	71	$	17	$	-	$	51

Operating Partnership Units Issued in Connection with Acquisitions

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021, there were 0 operating partnership units issued.

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

~~During the nine months ended September 30, 2019, there were 0 operating partnership units issued directly or indirectly, to affiliated entities.~~

Commissions

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, we incurred real estate commissions of ~~$583,~~$250 and $324, to GOLDMARK Commercial Real Estate Services, Inc., which is controlled by Messrs. Regan and Wieland. ~~During the nine months ended September 30, 2019, there~~There were 0 outstanding commissions ~~incurred with GOLDMARK Commercial Real Estate Services, Inc.. As~~owed as of ~~September 30, 2020, we owed $250 in commissions to GOLDMARK Commercial Real Estate Services, Inc. As of~~March 31, 2021 or December 31, ~~2019, there were 0 unpaid commissions to GOLDMARK Commercial Real Estate Services, Inc.~~2020.

~~During the nine months ended September 30, 2020, we incurred real estate commissions~~29

Table of ~~$308, to GOLDMARK Property Management, which is controlled by Messrs. Regan, Wieland~~Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021 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~~ (UNAUDITED)

(Dollar amounts in ~~commissions to GOLDMARK Property Management. As of December 31, 2019, there were 0 unpaid commissions to GOLDMARK Property Management.~~thousands, except share and per share data)

Rental Income

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we received rental income of ~~$63~~$67 and ~~$42,~~$67, respectively, under an operating lease agreement with ~~our Advisor.~~GOLDMARK Property Management, Inc.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we received rental income of ~~$43~~$14 and ~~$42,~~$14, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate, ~~Services,~~ Inc.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we received rental income of ~~$202~~$22 and ~~$173,~~$21, respectively, under operating lease agreements with ~~GOLDMARK Property Management.~~our Advisor.

During the three months ended March 31, 2021 and 2020, we received rental income of $122 and $120, respectively, under an operating lease agreement with Bell Bank.

Other operational liabilities and receivables

During the three months ended March 31, 2021 and 2020, the Trust incurred $174 and $0, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. As of March 31, 2021 and December 31, 2020, operational outstanding liabilities were $121 and $684, respectively.

Debt Financing

As of March 31, 2021 and December 31, 2020, the Trust had $67,935 and $51,915, respectively, of outstanding principal on loans entered into with Bell Bank. During the three months ended March 31, 2021 and 2020, the Trust incurred interest expense on debt held with Bell Bank of $587 and $514, respectively. Accrued interest as of March 31, 2021 and December 31, 2020, related to this debt was $123 and $121, respectively.

Insurance Services

On November 1, 2020, the Trust obtained a traditional insurance policy with Bell Insurance. The policy provides coverage for the Trust’s Commercial segment. As of March 31, 2021, total premiums paid for this policy was $113. There was 0 such policy in place with Bell Bank as of March 31, 2020.

NOTE 1417 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

Risk of Uninsured Property Losses

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

Litigation

The 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 Trust.

Significant Risks and Uncertainties

During the quarter ended September 30, 2020, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.

NOTE 1518 – DISPOSITIONS

During the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the operating partnership ~~sold 2~~did not dispose of any properties. ~~We sold a retail~~During the three months ended March 31, 2020, the Trust disposed of 1 property located in Apple Valley, Minnesota, for $3,670 and recognized a gain of $1,455 in March 2020. ~~We sold an office~~

The Trust had 1 property ~~located~~that qualified for held for sale accounting treatment and as such, the assets and liabilities associated with this property were separately classified as held for sale in ~~St. Cloud, Minnesota, for $2,050~~the consolidated balance sheet as of March 31, 2021 and ~~recognized a gain of $1 in May~~December 31, 2020. ~~During the nine months ended September 30, 2019, the operating partnership did~~ ~~not~~ ~~dispose of any properties.~~

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

The following table shows the net book value of assets held for sale.


	March 31,		December 31,
	2021		2020

	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	150	$	150
Building and improvements		1,428		1,428
Real estate investments		1,578		1,578
Less accumulated depreciation		(749)		(749)
Real estate investments, net		829		829
Other assets, net		1		2

Total Assets	$	830	$	831

LIABILITIES
Tenant security deposits payable	$	5	$	5
Accrued expenses and other liabilities	$	12	$	—

Total Liabilities	$	17	$	5

NOTE 1619 – ACQUISITIONS

The Trust had 0 acquisitions during the three months ended March 31, 2021.

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

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

1/12/20

Wolf Creek

Fargo, ND

Apartment complex

54 units

4,968

Wolf Creek

Fargo, ND

Apartment complex

54 units

4,968

1/31/20

Columbia Park Village

Grand Forks, ND

Apartment complex

12 units

612

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

Belmont East & West

Bismarck, ND

Apartment complex

26 units

1,494

3/1/20

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,296

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,296

3/1/20

Hawn

Fargo, ND

Apartment complex

48 units

2,400

Hawn

Fargo, ND

Apartment complex

48 units

2,400

3/1/20

Rosser

Bismarck, ND

Apartment complex

24 units

1,296

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

12,066

(a)

(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 ~~$842,~~$636, special assessments assumed and capitalized of ~~$307~~$168 or additional costs incurred due to a difference in unit price of $26.

Total consideration given for acquisitions through ~~September 30,~~March 31, 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 ~~$538,~~$265, a mortgage of $3,225 ~~1031 exchange funds of $5,658~~ and cash of ~~$2,739.~~$375. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

~~The Trust had 0 acquisitions during the nine months ended September 30, 2019.~~

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

Nine Months Ended

September 30,

2020

2019

Land, building, tenant improvements and FF&E

$
21,191

$
-
Other liabilities

(538)

-
Net assets acquired

20,653

-
Equity/limited partnership unit consideration

(9,031)

-
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange

(5,658)

-
New loans

(3,225)

-

Net cash consideration

$
2,739

$
-

~~Estimated Value of Units/Shares~~

The Board of Trustees determined an estimate of fair value for the trust shares in the first nine months of 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 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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~March 31, 2021 and ~~2019~~2020 (UNAUDITED)

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

typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition.

The ~~Board determined~~following table summarizes the acquisition date fair ~~value of~~values, before pro-rations, the ~~shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020. The Board determined~~Company recorded in conjunction with the ~~fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019.~~acquisitions discussed above:

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


	Three Months Ended
	March 31,
	2021		2020

Land, building, tenant improvements and FF&E	$	-	$	12,896
Other liabilities		-		(265)
Net assets acquired		-		12,631
Equity/limited partnership unit consideration		-		(9,031)
New loans		-		(3,225)

Net cash consideration	$	-	$	375

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

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

NOTE 1720 - SUBSEQUENT EVENTS

On ~~October 5, 2020, the Trust purchased 60% of a 146,000 SF vacant lot in Rogers, Minnesota as tenants in common with an unrelated third party for a total purchase price of $1,100.~~

~~On October~~April 15, ~~2020,~~2021, we paid a dividend or distribution of ~~$0.26469~~$0.265 per share on our common shares of beneficial interest or limited partnership units, respectively, to common shareholders and limited partnership unit holders of record on ~~September 30, 2020.~~March 31, 2021.

~~Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that~~On April 28, 2021, the ~~transactions will be completed.~~Trust disposed of a commercial real estate property located in Waite Park, Minnesota for $900.

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

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

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

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

Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our business 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

Our real estate portfolio consisted of 179 properties containing 10,328 apartment units and approximately 1,642,000 square feet of leasable commercial space as of March 31, 2021. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $682,890, which includes construction in progress. Currently Sterling’s acquisition strategy and focus is solely on multifamily apartment properties. Substantially all of our business is conducted through our Operating Partnership, of which we are the sole general partner. The Trust controls the operating partnership as the general partner and owns approximately 35.35% of the operating partnership as of March 31, 2021. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, the proportionate shares of the assets and income of the operating partnership are deemed to be the assets and income of the Trust. Subject to certain restrictions and limitations, our business is externally managed by our advisor pursuant to an advisory agreement, Sterling Management, LLC manages our operations and our portfolio of real estate properties. Sterling Management, LLC also provides portfolio-management, marketing, investor-relations and other administrative services on our behalf. We have no paid employees.

Table of Contents

Critical Accounting Estimates

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

Impairment of Real Estate Investments

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

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

a substantial decline or continued low occupancy rate;

continued difficulty in leasing space;

significant financially troubled tenants;

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

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

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

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

projected capital expenditures and lease origination costs;

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

comparable selling prices; and

property specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. Based on evaluation, there were no impairment losses during the three months ended March 31, 2021 and 2020.

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the three months ended March 31, 2021 included elsewhere in this report.

Table of Contents

Principal Business Activity

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~~Code. Sterling currently owns directly and ~~that 75% of its gross income must be derived from real estate.~~indirectly 179 properties. 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 179~~Trust’s 133 residential properties ~~containing 10,184 apartment units and approximately 1,692,000 square feet of leasable commercial space as of~~ ~~September 30, 2020. The portfolio has a net book value of real estate investments (cost less accumulated~~ ~~depreciation) of approximately $682,862, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties~~

We operate as an Umbrella Partnership Real Estate Investment Trust (UPREIT), which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we hold all or substantially all of our assets through our operating partnership. We control the operating partnership as the sole general partner and own approximately 34.82% of the operating partnership as of 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.~~

~~Table of Contents~~

~~As of September 30, 2020, approximately 73.7% of our properties were apartment communities located primarily~~ in North Dakota, ~~with others located in~~ Minnesota, Missouri and ~~Nebraska. Most~~Nebraska and are principally multifamily apartment buildings. The Trust owns 46 commercial properties ~~are leased to a variety of tenants under short-term leases.~~

~~As of September 30, 2020, approximately 26.3% of our properties were comprised of office, retail, industrial, restaurant and medical commercial property~~primarily located ~~primarily~~ in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the Trust’s mix of properties is 76.9% residential and 23.1% commercial (based on cost) and total $682,890 in real estate investments at March 31, 2021. The Trust has one property held for sale located in Waite Park, Minnesota at March 31, 2021. The carrying value of assets held for sale at March 31, 2021 is $830. Currently our focus is limited to multifamily apartment properties. We currently have ~~both single and multi-tenant~~no plans with respect to our commercial properties. We will consider unsolicited offers for purchase of commercial properties ~~in the commercial portfolio, most of which are under long-term leases.~~on a case by case basis.


Residential Property	Location	No. of Properties	Units
	North Dakota	112	6,378
	Minnesota	16	3,147
	Missouri	1	164
	Nebraska	4	639
		133	10,328

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	20	772,000
	Arkansas	2	28,000
	Colorado	1	17,000
	Iowa	1	33,000
	Louisiana	1	15,000
	Michigan	1	12,000
	Minnesota	13	668,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		46	1,642,000

~~Our Board~~

Results of ~~Trustees and Executive Officers~~Operations

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 eight members on our board, six of whom are independent.Management Highlights

~~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, 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 28 full-time employees.

~~Critical Accounting Estimates~~

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

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the nine months ended September 30, 2020 included elsewhere in this report.

●

Increased reveues from rental operations by $1,854 or 6.2% for the three months ended March 31, 2021, compared to the same three month period in 2020.

●

Increased economic occupancy by 1.9% in the residential market and increased physical occupuancy by 1.5% in the commercial market for the three months ended March 31, 2021 compared to the same three month period in 2020.

●

Declared and paid dividends aggregating $0.2650 per common share for the three months ending March 31, 2021.

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~~Specific Achievements~~

●

~~Increased revenues from rental operations by $693 or 2.3% for the three months ended 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.~~

●

~~Acquired seven residential properties and one commercial property during the nine months ended September 30, 2020.~~

●

~~Disposed of two commercial properties during the nine months ended September 30, 2020.~~

●

~~Declared dividends aggregating $0.7941 per common share for the nine months ended September 30, 2020.~~

Results of Operations for the Three Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

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


	Three months ended March 31, 2021						Three months ended March 31, 2020
	Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	25,959	$	5,801	$	31,760	$	23,995	$	5,911	$	29,906
Real Estate Expenses
Real Estate Taxes		2,579		665		3,244		2,476		688		3,164
Property Management		3,092		188		3,280		3,305		249		3,554
Utilities		2,584		240		2,824		2,419		304		2,723
Repairs and Maintenance		4,829		382		5,211		4,889		507		5,396
Insurance		763		29		792		823		39		862
Total Real Estate Expenses		13,847		1,504		15,351		13,912		1,787		15,699
Net Operating Income	$	12,112	$	4,297		16,409	$	10,083	$	4,124		14,207
Interest						4,287						4,350
Depreciation and amortization						5,328						5,252
Administration of REIT						1,201						1,162
Other income						(243)						(1,784)
Net Income					$	5,836					$	5,227

Net Income Attributed to:
Noncontrolling Interest					$	3,784					$	3,414
Sterling Real Estate Trust					$	2,052					$	1,813
Dividends per share⁽¹⁾					$	0.2650					$	0.2647
Earnings per share					$	0.2100					$	0.1900
Weighted average number of common shares						9,983						9,562

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

Revenues

Property revenues of ~~$30,866~~$31,760 for the three months ended ~~September 30, 2020~~March 31, 2021 increased ~~$693~~$1,854 or ~~2.3%~~6.2% in comparison to the same period in ~~2019.~~2020. Residential property revenues increased ~~$1,196~~$1,964 and commercial property revenues decreased ~~$503.~~$110.

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


	September 30,		September 30,		March 31,		March 31,
	2020		2019		2021		2020
Residential occupancy	93.2	%	93.9	%	94.7	%	92.8	%
Commercial occupancy					91.9	%	90.0	%

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Residential revenues for the three months ended ~~September 30, 2020~~March 31, 2021 increased ~~$1,196 or 5.1%~~$1,964 in comparison to the same period for ~~2019.~~2020. Residential properties acquired since January 1, 2020 contributed approximately ~~$644~~$1,072 to the increase in total residential revenues infor the three months ended ~~September 30, 2020.~~March 31, 2021. The remaining increase is due to ~~decreased rental incentives due to increased renewals,~~ increased rent charges at our stabilized properties as well as decreased vacancy in the ~~increased income related to Ratio Utility Billing System (RUBS) Income in our Minneapolis, Minnesota~~Fargo 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 ~~September 30, 2020 of 0.70%.~~ March 31, 2021 increased 1.9% primarily due to decreased vacancy, caused by rent proceeds received on delinquent charges.

For the three months ended ~~September 30, 2020,~~March 31, 2021, total commercial revenues decreased ~~$503 or 7.7%~~$110 in comparison to the same period for ~~2019. Vacant office space~~2020. The decrease was primarily attributable to the sale of three commercial real estate investments in commercial properties located in the Fargo, North Dakota region constituted $217 of the decreased revenues. As of September 30, 2020, these properties are considered fully leased through an executed 12 year lease. In addition, disposition of two commercial2020. These properties account for ~~$141 in~~$324 of decreased ~~revenues~~commercial rent during the three months ended ~~September 30, 2020.~~March 31, 2021. The ~~remaining~~overall commercial income decrease ~~relates~~was offset due to ~~the amortization of~~ straight line ~~rents~~rental income from new leases entered into at a commercial ~~office building~~properties located in ~~our~~Fargo, ND and Minneapolis, ~~Minnesota market as well as overall decreased estimated common area maintenance income~~MN. The commercial occupancy rates for the three months ended ~~September 30, 2020 as compared~~March 31, 2021 increased 1.9% primarily due to new leases entered into in the same period in 2019. Commercial revenues comprised 19.5% of the total revenues for the three months ended September 30, 2020 compared to 21.6% of total revenues for the three months ended September 30, 2019.Fargo, ND market.

Expenses

Residential expenses from operations of ~~$13,506~~$13,847 during the three months ended ~~September 30, 2020~~March 31, 2021 decreased ~~$64~~$65 or 0.5% in comparison to the same period in ~~2019. Though the net~~2020. The decrease ~~is relatively comparable to the same period in 2019, expenses as shown in the above table vary significantly by category as compared to the same period in 2019. The net decrease is~~was attributed to ~~decreased repairs~~a reduction in property management fees, on-site staff costs and ~~maintenance expense~~other miscellaneous expenses of ~~$444~~$221 or ~~7.7%,~~6.7%. Property management fees approximate 5% of net collected rent. This decrease is offset by increased real estate taxes of ~~$142~~$103 or ~~6.1%, and~~4.2%. The main reason for the increase in real estate taxes is related to residential property ~~insurance~~acquisitions during the year ended December 31, 2020, which accounts for $60 of the increase. Further, the decrease was offset by increased utilities expense of ~~$289~~$165 or ~~57.3%. Actual property management fees remained unchanged~~6.8%, driven by an increase in water and ~~continue to approximate 5% of net collected rents; however, other property management related expenses also decreased~~sewer expense during the three months ended 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.March 31, 2021.

Commercial expenses from operations of ~~$1,796~~$1,504 during the three months ended ~~September 30, 2020~~March 31, 2021 decreased ~~$14~~$283 or ~~0.8%~~15.8% in comparison to the same period in ~~2019.~~2020. The ~~net~~ decrease in overall expenses is attributed to ~~COVID-19, causing shelter-in-place orders~~a decrease in ~~many locations where our office space is located, resulting in decreased property management expenses of $55 or 21.4% and decreased utility costs of $22 or 7.1%. Furthermore,~~ repairs and maintenance expense of $125 or 24.7% with snow removal accounting for $31 or 24.8% of the decrease. Utility expenses during the three months ended ~~September 30,~~March 31, 2021 decreased by $64 or 21.1% in comparison to the same period 2020, ~~increased $65 or 12.2%, offsetting~~also contributed to the above decreases. A primary factor for reported increased repairs and maintenance expense, is due to 2019 direct tenant billbacks of $120, offsetting repairs and maintenance expense for the period then ended. Repairs and maintenance expense decreased $55 when focusing specifically on expenses incurred related to business operations.overall decrease.

Interest expense of ~~$4,187~~$4,287 during the three months ended ~~September 30, 2020~~March 31, 2021 decreased ~~$334~~$63 or ~~7.4%~~1.4% in comparison to the same period in ~~2019. Payoffs~~2020. Pay offs 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~~consolidated mortgage ~~debt.~~debt by 31 basis points. The lower consolidated mortgage rate decreased total interest paid on mortgages by ~~$172 during the three months ended September 30, 2020~~$85 as compared to the same period in ~~2019, leading to~~2020, bringing mortgage interest expense as a ~~percent~~percentage of income ~~of 13.65%~~to 13.5% versus 14.5% in ~~2020 versus 14.53% in 2019.~~2020. Additionally, interest expense on construction in progress, ~~also contributed to~~offset the decrease in interest ~~expense as compared to the same period in 2019.~~expense. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense ~~by $165 during the three months ended September 30, 2020.~~and resulting in an increase of $37 in interest expense.

~~Table of Contents~~

Depreciation and amortization expense of $5,328 during the three months ended ~~September 30, 2020~~March 31, 2021 increased $6$76 or ~~0.1% in comparison~~1.4%. The increase is primarily due to the ~~same period~~property acquisitions that occurred in ~~2019.~~2020. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the three months ended ~~September 30,~~March 31, 2021 and 2020 was 16.8% and ~~2019 was 17.26% and 17.64%~~17.6%, respectively.

REIT administration expenses of ~~$972~~$1,201 during the three months ended ~~September 30, 2020~~March 31, 2021 increased $3$39 or ~~0.3%~~3.4% compared to the same period in 2020. The increase is attributable to an increase in the amount of the REIT advisory fee.

Other income of $243 for the three months ended March 31, 2021 decreased $1,541 or 86.4% in comparison to the same period in ~~2019, showing administrative expenses remaining consistent as compared~~2020. The decrease is attributed to disposition activity in the first quarter of 2020 that did not occur in the same period in ~~2019.~~

~~Other income~~2021. The total gain on the sale of ~~$189~~a real estate investment during the three months ended ~~September 30,~~March 31, 2020 ~~increased $700 or 136.99% in comparison to the same period in 2019. The primary reason for the increase~~ was that the future economic benefit of a portion of a commercial property in Fargo, North Dakota was determined to be non-recoverable. As such, during the three months ended September 30, 2019, 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.$1,455.

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Net Operating Income

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included ~~above for more information on NOI performance by segment.~~

~~Net Income~~

Net income for the three months ended September 30, 2020 was $5,266 compared to $3,470 for the three months ended 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,herein, 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~~

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included above for more information on NOI performance by segment.

Net Income

Net income for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 was ~~$16,890~~$5,836 compared to ~~$12,081~~$5,227 for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Known Trends, Events and Uncertainties

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~~year ended ~~September 30,~~December 31, 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.~~economy. 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,~~March 31, 2021, the Trust continued to monitor state and federal legislative actions and efforts in ~~regards~~regard 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,~~As of March 31, 2021, 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.

Property Acquisitions and Dispositions

Property Acquisitions and Dispositions during the three months ended March 31, 2021

There were no acquisitions or dispositions during the three months ended March 31, 2021.

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Table of Contents

~~Property Acquisitions and Dispositions~~

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

We acquired ~~eight~~six properties for a total of ~~$21,191~~$12,896 during the ~~nine~~three months ended ~~September 30,~~March 31, 2020. Total consideration for the acquisitions was the issuance of approximately $9,031 in limited partnership units of the operating partnership, assumed liabilities of ~~$538,~~$265, cash of ~~$2,739,~~$375 and a mortgage of ~~$3,225, and 1031 exchange funds of $5,658.~~$3,225.

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

See Notes 1518 and 16 19 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019.~~.

Construction in Progress and Development Projects

Construction in progress as of ~~September 30, 2020~~March 31, 2021 consists primarily of ~~development and planning costs associated with the Goldmark Office Park building~~construction at Bell Plaza located in ~~Fargo, North Dakota,~~Minneapolis, Minnesota, the Montreal Courts ~~Apartment~~Apartments located in Little Canada, Minnesota, ~~and~~ the Bayview Apartments located in Fargo, North Dakota, and Trustmark located in Fargo, North Dakota. The ~~Goldmark Office Park consists of three commercial office buildings. Current expectations are that~~Bell Plaza work includes updated HVAC and thermostats throughout the project which includes building renovations, reconstruction of portions of the office park and additional amenities will be completed in phases with the primary phase completed in 2020. The current project budget is approximately $6,790 of which $6,718 has been incurred and is included in construction in progress. The Montreal Courts Apartments development consists of a new clubhouse.building. Current expectations are that the project will be completed in the ~~fourth~~second quarter of ~~2020~~2021 and the current project budget approximates ~~$3,752~~$1,000 of which ~~$1,405~~$998 has been incurred and included in construction in progress. The Montreal Courts development consists of a new clubhouse. The current project budget approximates $1,965 of which $1,827 has been incurred and the remaining budgeted cost is accrued for at March 31, 2021. The project is included in construction in ~~progress.~~progress until final payment of all costs have been made which is expected to occur during the second quarter of 2021. The Bayview Apartments development consists of new windows and siding. Current expectations are that the project will be completed in the ~~fourth~~second quarter of ~~calendar year 2020~~2021 and the current project budget approximates ~~$1,893~~$1,501 of which ~~$1,152~~$1,418 has been incurred and is included in construction in progress.

As The Trustmark construction primarily consists of ~~September 30, 2020,~~office demolition and clearing, as well as tenant space remodel and build-outs. Current expectations are that the ~~development project at~~projects will be completed in the ~~Glen Pond Apartments located in Eagan, Minnesota, was completed,~~second quarter of 2021 and the ~~development was put into service. Final cost~~current project budgets approximate $5,398 of ~~the development was $16,540.~~

~~The Trust~~which $2,968 has been incurred and is ~~involved with two joint ventures as of September 30, 2020.~~included in construction in progress.

Funds From Operations (FFO)

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

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

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

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

While FFO applicable to common shares and limited partnership units are widely used by REITs as performance metrics, all REITs do not use the same definition of FFO or calculate FFO in the same way. The FFO reconciliation presented here is not necessarily comparable to FFO presented by other real estate investment trusts. FFO should also not be considered as an alternative to net income as determined in accordance with GAAP as a measure of a real estate investment trust’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO applicable to common shares and limited partnership units does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of sufficient cash flow to fund a real estate investment trust’s needs or its ability to service indebtedness or to pay dividends to shareholders.

The following tables include calculations of FFO and the reconciliations to net income, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. We believe these calculations are the most comparable GAAP financial ~~measure (in thousands):~~measure:

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, 2021						Three months ended March 31, 2020
			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	$	2,052	9,983	$	0.21	$	1,813	9,562	$	0.19

Add back:
Noncontrolling Interest - OPU		3,753	18,260				3,419	18,036
Depreciation & Amortization from continuing operations		5,328					5,252
Pro rata share of unconsolidated affiliate depreciation & amortization		140					94
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)	$	11,273	28,243	$	0.40	$	9,123	27,598	$	0.33

(1)	Please see Note 911 and Note 1113 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.

~~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.

Table of Contents

Evaluation of Liquidity

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

Credit Quality of Tenants

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

To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our ~~tenant’s~~tenants’ 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~~Generally our residential leases are ~~scheduled to expire~~for a term of one year or ~~renew in~~less. There are two commercial leases expiring within the next twelve ~~months.~~months that are considered significant. As of March 31, 2021 and 2020, revenues of $327 and $321, respectively, were received from these leases. The Advisor, with the assistance of our ~~commercial~~ property managers, actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where ~~commercial~~ tenants elect not to renew, we may seek replacement tenants or try to sell the property.

Cash Flow Analysis

Our objectives are to generate sufficient cash flow over time to provide shareholders with increasing dividends and to seek investments with potential for strong returns and capital appreciation throughout varying economic cycles. We have funded 100% of the dividends from operating cash flows. In setting a dividend rate, we focus primarily on expected returns from investments we have already made to assess the sustainability of a particular dividend rate over time.

Nine Months Ended

September 30,

2020

2019

(in thousands)
Net cash flows provided by operating activities

$
35,988

$
34,015
Net cash flows used in investing activities

$
(28,173)

$
(9,883)
Net cash flows used in financing activities

$
(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 ~~$35,988~~$8,909 and ~~$34,015~~$7,184 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization.

Investing Activities

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

Table of Contents

Net cash used in investing activities was ~~$28,173~~$4,116 and ~~$9,883~~$1,613 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ cash flows used in investing activities related ~~specifically~~ to the acquisition of properties and capital expenditures was ~~$33,059~~$3,686 and ~~$8,935,~~$5,433, respectively. ~~During~~Cash outlays related to investments in unconsolidated affiliates was $2,090 and $38 during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, a note receivable of $363 bearing a 6.5% interest rate, payable over five years was issued as well as two notes receivable equaling $400 bearing a 6% interest rate payable over three years. In addition, during the nine months ended September 30, 2020 and 2019, proceeds of $1,077 and $1,513 were receivedrespectively. Gains from involuntary conversions ~~respectively. During~~for the ~~nine~~three months ended ~~September 30, 2020, proceeds of $5,483 were generated~~March 31, 2021 was $1,642. Gains from ~~the~~ sale of ~~two commercial properties.~~real estate investments during the three months ended March 31, 2020 was $3,494.

Financing Activities

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

Net cash used in financing activities was $2,081 and $7,260 for the three months ended March 31, 2021 and 2020. During the three months ended March 31, 2021, we paid $5,761 in dividends and distributions, redeemed $1,405 of shares and units, received proceeds of $18,485 from new mortgage notes, and made mortgage principal payments of $14,528. For the three months ended March 31, 2020, we paid $5,534 in dividends and distributions, redeemed $1,237 of shares and units, received proceeds of $7,788 from new mortgage notes, and made mortgage principal payments of $9,129.

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in the first three months of 2021 and 2020. 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 months of 2021 and 2020. In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations. The Board typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition.

The Board determined the fair value of the shares and limited partnership units to be $20.00 per share/unit effective January 1, 2021. The Board determined the fair value of the shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020.

Determination of price is a matter within the Board’s sole discretion. The Trust does not determine price based on any rate formula or specific factors. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor.

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~~Net cash used~~Furthermore, in ~~financing activities was $10,247 and $32,097 for~~reaching an estimate of the ~~nine months ended September 30, 2020 and 2019, respectively. During~~value of the ~~nine months ended September 30, 2020, we paid $17,012 in dividends and distributions, redeemed $2,786 of~~ shares and limited partnership 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~~Board applied a liquidity discount to one valuation scenario in ~~dividends and distributions, redeemed $1,573 of~~order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange and ~~made mortgage principal payments~~did not consider a discount for debt that may include a prepayment obligation or a provision precluding assumption of ~~$16,330.~~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.

Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, ~~2020~~2021 to ~~September 30, 2020~~March 31, 2021 totaling ~~$7,648~~$2,642 or ~~$0.7941~~$0.2650 per share, of which ~~$2,721 was~~$963 were cash dividends and ~~$4,927~~$1,679 were reinvested ~~through~~under the dividend reinvestment plan. The cash dividends were paid with the ~~$35,988~~$8,909 from our cash flows from operations and ~~$239~~$1 provided by distributions from unconsolidated affiliates.

We declared cash dividends to our shareholders during the period from January 1, ~~2019~~2020 to ~~September 30, 2019~~March 31, 2020 totaling ~~$7,216~~$2,527 or ~~$0.7838~~$0.2647 per share, of which ~~$2,548 was~~$919 were cash dividends and ~~$4,668~~$1,608 were reinvested ~~through~~under the dividend reinvestment plan. The cash dividends were paid with the ~~$34,015~~$7,184 from our cash flows from ~~operations.~~operations and $105 provided by distributions from unconsolidated affiliates.

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				Three Months Ended
	September 30,				March 31,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
Cash flows provided by operations (includes net income of $16,890 and $12,081, respectively)	$	35,988	$	34,015
Cash flows provided by operations (includes net income of $5,836 and $5,227, respectively)					$	8,909	$	7,184
Distributions in excess of earnings received from unconsolidated affiliates		239		(32)		1		105
Gain (Loss) on sales of real estate and non-real estate investments		1,456		—		—		1,455
Dividends declared		(7,648)		(7,216)		(2,642)		(2,527)
Excess	$	30,035	$	26,767	$	6,268	$	6,217

Limited Partnership Units

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

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we declared quarterly distributions totaling ~~$14,484~~$4,835 to holders of limited partnership units in our operating partnership, which we paid on April 15, ~~July 15, and October~~2021. Distributions were paid at a rate of $0.2650 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the three months ended March 31, 2020, we declared quarterly distributions totaling $4,831 to holders of limited partnership units in our operating partnership, which we paid on April 15, 2020. Distributions were paid at a rate of $0.2647 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

For the nine months ended September 30, 2019, we declared quarterly distributions totaling $13,973 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, and October 15, 2019. Distributions were paid at a rate of $0.2613 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

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Sources of Dividends and Distributions

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we paid aggregate dividends and distributions of ~~$7,536,~~$7,447, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was ~~$31,558. Therefore,~~$11,273 for the three months ended March 31, 2021; therefore we believe our ~~management believes our~~dividend and distribution policy is sustainable over time. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we paid aggregate dividends and distributions of ~~$7,060~~$7,118, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was ~~$28,679~~$9,123 as of the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.

Cash Resources

At ~~September 30, 2020,~~March 31, 2021, our ~~unrestricted~~ cash resources consisted of cash and cash equivalents totaling approximately ~~$6,499.~~$13,888. 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 ~~$64,234,~~$51,314, which could potentially be used as collateral to secure additional financing in future periods.

At ~~September 30, 2020,~~March 31, 2021, there was no balance outstanding on ~~our~~the lines of credit. ~~The lines~~Of the $28,215 available as of March 31, 2021, one variable rate line of credit ~~aggregate $31,415 in total availability and are collateral for~~secured two letters of credit totaling ~~$1,216,~~$746, leaving ~~$30,199~~$27,469 available and unused under the agreements. See Note 57 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.

The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the ~~nine~~three months ended ~~September 30,~~March 31, 2021, we did not sell any common shares in a private placement. During the three months ended March 31, 2021, 89,000 common shares were issued pursuant to dividend reinvestments and 65,000 were issued pursuant to additional optional cash purchases under the plan, and raised gross proceeds of $2,993. During the three months ended March 31, 2020, we did not sell any common shares in a private placement. During the ~~nine~~three months ended ~~September 30,~~March 31, 2020, ~~we issued 265,000 and 134,000~~87,000 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 $7,415. During the nine months ended September 30, 2019, we did not sell any common shares in a private placement. During the nine months ended September 30, 2019, we issued 255,000 and 178,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively, and raised gross proceeds of $7,002.$2,787.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021, we issued no limited partnership units in connection with acquisition of properties.

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

~~Off-Balance Sheet~~Unconsolidated Affiliate Arrangements

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, we had ~~no off-balance sheet arrangements that have or are reasonably likely~~debt obligations related to ~~have a current or future effect on our financial condition, changes~~investments in ~~financial condition, revenues or expenses, results~~unconsolidated affiliates of ~~operations, liquidity, capital expenditures or capital resources.~~

~~Inflation~~

~~Substantially all of our multifamily property leases are~~$52,276 and $41,559, respectively. The Trust is jointly and severally liable for ~~a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or~~ the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore will expose us to the effect of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter term leases.

As of September 30, 2020, most of our commercial leases require tenants to pay directly or reimburse us for a share of our operating expenses. As a result, we are often able to pass on much of any increases to our property operating expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues. During the nine months ended September 30, 2020, inflation did not have a material impact on our revenues or net income.full mortgage balance.

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Item 3. Quantitative and 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 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, 2021, resulting in a liability of $341 and asset of $920. As ~~virtually all~~of December 31, 2020, the fair value adjustment resulted in a liability of $1,805.

As much 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~~2020 filed with the Securities and Exchange Commission on March 13, ~~2020.~~2021.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

~~Our management, with the participation of our~~Sterling Real Estate Trust’s Chief Executive Officer and Chief Financial Officer ~~has~~have evaluated the effectiveness of ~~our~~Sterling Real Estate Trust’s disclosure controls and procedures (as ~~such term is~~ defined in ~~Rule~~Rules 13a-15(e) ~~under~~and 15d-15(e) of the ~~Securities~~ Exchange ~~Act of 1934, as amended)~~Act) as of the end of the period covered by this ~~report.~~ Report.Based on ~~such~~that evaluation, ~~our~~the Company’s Chief Executive Officer and Chief Financial Officer ~~have~~ concluded that ~~as of September 30, 2020, such~~the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were not effective as of December 31, 2020 due to ~~ensure that information required~~a material weakness in internal control over financial reporting.

Material Weakness in Internal Control over Financial Reporting

At December 31, 2020, the Trust concluded its internal controls over financial reporting surrounding management’s review of the appropriate hedging documentation failed to ~~be disclosed by us~~identify the drafting error in the ~~reports that we file~~internal documentation relating to the method used to test the effectiveness of the Trust’s hedging relationships. In addition, the contemporaneous documentation and fair value hedge effectiveness requirements of ASC 815 were not applied appropriately for the hedging relationships at inception. The ineffectiveness of these internal controls did not result in a restatement of previously issued interim or ~~submit under~~annual consolidated financial statements.

As of March 31, 2021, the ~~Exchange Act is recorded, processed, summarized~~following remediation measures have been implemented:

Improved training, education and accounting reviews designed to ensure that all relevant personnel involved in derivative transactions understand and apply hedge accounting in compliance with generally accepted accounting principles, including ASC 815 and its related interpretations.

ii.

Enlisting the use of a third-party specialist for any new hedging relationship entered into subsequent to the date of the financial statements being issued, to evaluate the effectiveness of the hedging relationship at the inception of each hedge.

iii.

All hedges entered into by the Trust prior to March 31, 2021, have been subsequently re-designated and are considered to be highly effective hedges.

We believe these remediation measures have strengthened our internal control over financial reporting and ~~reported within~~have remediated 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,~~material weakness identified as ~~appropriate to allow timely decisions regarding required disclosure.~~of December 31, 2020.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the ~~second~~first fiscal quarter of ~~2020~~2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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 ~~September 30, 2020.~~

March 31, 2021.

Other Sales

During the three months ended ~~September 30, 2020,~~March 31, 2021, we did not ~~issue~~issued 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 ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:

Average

Total Number of

Total Number of

Approximate Dollar Value of

Total Number

Total Number

Price

Shares Redeemed

Units Redeemed

Shares (or Units) that May

of Common

of Limited

Paid per

as Part of

as Part of

Yet Be Redeemed Under

Shares

Partner Units

Common

Publicly Announced

Publicly Announced

Publicly Announced
Period

Redeemed


Redeemed

Share/Unit

Plans or Programs

Plans or Programs

Plans or Programs
January 1-31, 2020

13,000

13,000

$
18.25

1,250,000

846,000

$
5,395
February 1-28, 2020

4,000

14,000

$
18.25

1,254,000

860,000

$
5,065
March 1-31, 2020

21,000

3,000

$
18.25

1,275,000

863,000

$
4,625
Total

38,000

30,000

April 1-30, 2020

53,000

5,000

$
18.25

1,328,000

868,000

$
3,582
May 1-31, 2020

4,000

7,000

$
18.25

1,332,000

875,000

$
3,376
June 1-30, 2020

—

—

$
18.25

1,332,000

875,000

$
8,376
Total

57,000

12,000

July 1-31, 2020

—

5,000

$
18.25

1,332,000

880,000

$
8,281
August 1-31, 2020

3,000

1,000

$
18.25

1,335,000

881,000

$
8,205
September 1-30, 2020

3,000

3,000

$
18.25

1,338,000

884,000

$
8,076
Total

6,000

9,000


			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
January 1-31, 2021	9,000	—	$	19.00	1,371,000	899,000	$	7,157
February 1-29, 2021	21,000	26,000	$	19.00	1,392,000	925,000	$	6,274
March 1-31, 2021	11,000	7,000	$	19.00	1,403,000	932,000	$	5,920
Total	41,000	33,000

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we redeemed all shares or units for which we received redemption requests. In addition, for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, 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 $40,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of ~~September 30, 2020,~~March 31, 2021, was ~~$8,076.~~$5,920. The redemption price for such shares and units redeemed under the plan was fixed at ~~$18.25~~$19.00 per share or unit, which became effective January 1, ~~2020.~~2021. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plan at any time if it determines to do so is in our best interest.

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Item 6. Exhibits.


Exhibit
Number		Title of Document

10.1		Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan approved March 25, 2021 (incorporated by reference to Exhibit No. 10.1 to the Trust’s Current Report on Form 8-K filed March 31, 2021).
10.2		Tenth Amended and Restated Advisory Agreement, effective April 1, 2021 (incorporated by reference to Exhibit No. 10.2 to the Trust’s current report on Form 8-K filed March 31, 2021).
31.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief 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 ~~September 30, 2020~~March 31, 2021, formatted in iXBRL (Inline ~~eXtensible~~iXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019;~~2020; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Consolidated Statements of Shareholders’ Equity for ~~the~~ three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ and; (v) Notes to Consolidated Financial Statements.

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

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SIGNATURES

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

Dated:~~November 6, 2020~~May 14, 2021

	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)

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