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~~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,~~4340 18th Ave S., Suite ~~100~~200, Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

1711 Gold Drive South, Suite 100, Fargo, North Dakota

(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:



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 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	☐

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~~8, 2021
Common Shares of Beneficial Interest, $0.01 par value per share		~~9,875,345.28~~10,357,118.45

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~~2021 and December 31, ~~2019~~2020	3
Consolidated Statements of Operations and Other Comprehensive Income – Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	4
Consolidated Statements of Shareholders’ Equity – Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	5
Consolidated Statements of Cash Flows – ~~Nine~~nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	7
Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3729
Item 3. Quantitative and Qualitative Disclosures About Market Risk	5142
Item 4. Controls and Procedures	5142

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5243
Item 6. Exhibits	5344
Signatures	5445

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~~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


	September 30,		December 31,
	2021		2020

	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	125,333	$	119,088
Building and improvements		755,294		712,560
Construction in progress		10,804		13,640
Real estate investments		891,431		845,288
Less accumulated depreciation		(174,088)		(160,575)
Real estate investments, net		717,343		684,713
Cash and cash equivalents		22,168		11,716
Restricted deposits		10,879		15,919
Investment in unconsolidated affiliates		15,147		9,659
Notes receivable		5,456		2,026
Assets held for sale		—		831
Lease intangible assets, less accumulated amortization		6,519		7,367
Other assets, net		10,888		10,798

Total Assets	$	788,400	$	743,029

LIABILITIES
Mortgage notes payable, net	$	462,150	$	421,278
Dividends payable		7,543		7,447
Tenant security deposits payable		5,174		4,908
Lease intangible liabilities, less accumulated amortization		856		994
Liabilities related to assets held for sale		—		5
Accrued expenses and other liabilities		15,761		16,869
Total Liabilities		491,484		451,501

COMMITMENTS and CONTINGENCIES - Note 13

SHAREHOLDERS' EQUITY
Beneficial interest		115,468		109,366
Noncontrolling interest
Operating partnership		179,582		181,621
Partially owned properties		2,198		2,346
Accumulated other comprehensive loss		(332)		(1,805)
Total Shareholders' Equity		296,916		291,528

	$	788,400	$	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, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2020		2019		2020		2019		2021		2020		2021		2020

	(in thousands, except per share data)				(in thousands, except per share data)				(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	$	33,053	$	30,866	$	96,736	$	91,593
Expenses
Expenses from rental operations
Operating expenses, excluding real estate taxes		12,142		12,344		35,639		36,355
Operating expenses										14,184		12,142		37,956		35,639
Real estate taxes		3,160		3,036		9,463		9,084		3,489		3,160		10,123		9,463
Depreciation and amortization		5,328		5,322		15,826		16,213		5,551		5,328		16,634		15,826
Interest		4,187		4,521		12,761		13,819		4,671		4,187		13,261		12,761
		24,817		25,223		73,689		75,471		27,895		24,817		77,974		73,689
Administration of REIT		972		969		3,218		3,051		1,007		972		3,267		3,218
Total expenses		25,789		26,192		76,907		78,522		28,902		25,789		81,241		76,907
Income from operations		5,077		3,981		14,686		11,753		4,151		5,077		15,495		14,686

Other income
Equity in income of unconsolidated affiliates		125		235		363		629
Equity in (losses) income of unconsolidated affiliates										(67)		125		(183)		363
Other income		64		70		333		186		1,085		64		1,574		333
Gain on sale of real estate and non-real estate investments		—		—		1,456		—
Gain/(loss) on involuntary conversion		—		(816)		52		(487)
Gain on sale of real estate investments										—		—		1,710		1,456
Gain on involuntary conversion										549		—		1,236		52
		189		(511)		2,204		328		1,567		189		4,337		2,204
Net income	$	5,266	$	3,470	$	16,890	$	12,081	$	5,718	$	5,266	$	19,832	$	16,890
Net income (loss) attributable to noncontrolling interest:
Operating Partnership		3,450		2,312		11,046		8,034		3,753		3,450		12,861		11,046
Partially owned properties		(28)		(55)		(15)		(101)		(139)		(28)		(148)		(15)
Net income attributable to Sterling Real Estate Trust	$	1,844	$	1,213	$	5,859	$	4,148	$	2,104	$	1,844	$	7,119	$	5,859

Net income per common share, basic and diluted	$	0.19	$	0.13	$	0.61	$	0.45
Net income attributable to Sterling Real Estate Trust per common share, basic and diluted									$	0.21	$	0.19	$	0.71	$	0.61

Comprehensive income:
Net income	$	5,266	$	3,470	$	16,890	$	12,081	$	5,718	$	5,266	$	19,832	$	16,890
Other comprehensive (loss) gain - change in fair value of interest rate swaps		(17)		6		(2,125)		14
Other comprehensive gain (loss) - change in fair value of interest rate swaps										(66)		(17)		1,473		(2,125)
Comprehensive income		5,249		3,476		14,765		12,095		5,652		5,249		21,305		14,765
Comprehensive income attributable to noncontrolling interest		3,411		2,261		9,641		7,942		3,571		3,411		13,661		9,641
Comprehensive income attributable to Sterling Real Estate Trust	$	1,838	$	1,215	$	5,124	$	4,153	$	2,081	$	1,838	$	7,644	$	5,124

Weighted average Common Shares outstanding		9,740		9,322		9,638		9,208
Weighted average Common Shares outstanding, basic and diluted										10,215		9,740		10,095		9,638

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED September 30, ~~2020~~2021 (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 declared

-

-

(2,527)

(2,527)

(4,831)

-

-

(7,358)
Dividends reinvested - stock dividend

87

1,584

-

1,584

-

-

-

1,584
Issuance of shares under optional purchase plan

62

1,203

-

1,203

-

-

-

1,203
Change in fair value of interest rate swaps

-

-

-

-

-

-

(1,486)

(1,486)
Net income

-

-

1,813

1,813

3,419

(5)

-

5,227
BALANCE AT MARCH 31, 2020

9,547

$ 133,352

$ (29,602)

$ 103,750

$ 181,299

$ 2,411

$ (1,449)

$ 286,011
Shares/units redeemed

(57)

(1,039)

-

(1,039)

(209)

-

-

(1,248)
Dividends declared

-

-

(2,544)

(2,544)

(4,828)

-

-

(7,372)
Dividends reinvested - stock dividend

88

1,608

-

1,608

-

-

-

1,608
Issuance of shares under optional purchase plan

32

611

-

611

-

-

-

611
Change in fair value of interest rate swaps

-

-

-

-

-

-

(622)

(622)
Net income

-

-

2,202

2,202

4,177

18

-

6,397
BALANCE AT JUNE 30, 2020

9,610

$ 134,532

$ (29,944)

$ 104,588

$ 180,439

$ 2,429

$ (2,071)

$ 285,385
Shares issued under trustee compensation plan

3

64

-

64

-

-

-

64
Shares/units redeemed

(6)

(118)

-

(118)

(183)

-

-

(301)
Dividends declared

-

-

(2,577)

(2,577)

(4,825)

-

-

(7,402)
Dividends reinvested - stock dividend

90

1,644

-

1,644

-

-

-

1,644
Issuance of shares under optional purchase plan

40

765

-

765

-

-

-

765
Change in fair value of interest rate swaps

-

-

-

-

-

-

(17)

(17)
Net income

-

-

1,844

1,844

3,450

(28)

-

5,266
BALANCE AT SEPTEMBER 30, 2020

9,737

$ 136,887

$ (30,677)

$ 106,210

$ 178,881

$ 2,401

$ (2,088)

$ 285,404


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

	(in thousands)
BALANCE AT DECEMBER 31, 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
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-	-	-	-	890	-	-	890
Shares/units redeemed	(15)	(292)	-	(292)	(1,853)	-	-	(2,145)
Dividends and distributions declared	-	-	(2,672)	(2,672)	(4,821)	-	-	(7,493)
Dividends reinvested - stock dividend	88	1,679	-	1,679	-	-	-	1,679
Issuance of shares under optional purchase plan	41	820	-	820	-	-	-	820
Change in fair value of interest rate swaps	-	-	-	-	-	-	(845)	(845)
Net income (loss)	-	-	2,963	2,963	5,355	(40)	-	8,278
BALANCE AT JUNE 30, 2021	10,082	$ 143,528	($ 30,038)	$ 113,490	$ 179,482	$ 2,337	($ 266)	$ 295,043
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-	-	-	-	1,993	-	-	1,993
Shares issued under trustee compensation plan	3	57	-	57	-	-	-	57
Shares/units redeemed	(6)	(105)	-	(105)	(810)	-	-	(915)
Dividends and distributions declared	-	-	(2,707)	(2,707)	(4,836)	-	-	(7,543)
Dividends reinvested - stock dividend	92	1,743	-	1,743	-	-	-	1,743
Issuance of shares under optional purchase plan	44	886	-	886	-	-	-	886
Change in fair value of interest rate swaps	-	-	-	-	-	-	(66)	(66)
Net income (loss)	-	-	2,104	2,104	3,753	(139)	-	5,718
BALANCE AT SEPTEMBER 30, 2021	10,215	$ 146,109	($ 30,641)	$ 115,468	$ 179,582	$ 2,198	($ 332)	$ 296,916

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~~SEPTEMBER~~ 30, ~~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, 2018

8,967

$ 122,624

$ (24,741)

$ 97,883

$ 183,360

$ 2,538

$ (30)

$ 283,751
Shares/units redeemed

(11)

(197)

-

(197)

(629)

-

-

(826)
Dividends declared

-

-

(2,374)

(2,374)

(4,661)

-

-

(7,035)
Dividends reinvested - stock dividend

82

1,479

-

1,479

-

-

-

1,479
Issuance of shares under optional purchase plan

49

929

-

929

-

-

-

929
Change in fair value of interest rate swaps

-

-

-

-

-

-

4

4
Net income

-

-

1,288

1,288

2,532

(30)

-

3,790
BALANCE AT MARCH 31, 2019

9,087

$ 124,835

$ (25,827)

$ 99,008

$ 180,602

$ 2,508

$ (26)

$ 282,092
Shares/units redeemed

(9)

(154)

-

(154)

(272)

-

-

(426)
Dividends declared

-

-

(2,407)

(2,407)

(4,657)

-

-

(7,064)
Dividends reinvested - stock dividend

86

1,554

-

1,554

-

-

-

1,554
Issuance of shares under optional purchase plan

42

795

-

795

-

-

-

795
Change in fair value of interest rate swaps

-

-

-

-

-

-

4

4
Net income

-

-

1,647

1,647

3,190

(16)

-

4,821
BALANCE AT JUNE 30, 2019

9,206

$ 127,030

$ (26,587)

$ 100,443

$ 178,863

$ 2,492

$ (22)

$ 281,776
Shares issued under trustee compensation plan

3

62

-

62

-

-

-

62
Shares/units redeemed

(13)

(242)

-

(242)

(79)

-

-

(321)
Dividends declared

-

-

(2,435)

(2,435)

(4,655)

-

-

(7,090)
Dividends reinvested - stock dividend

87

1,558

-

1,558

-

-

-

1,558
Issuance of shares under optional purchase plan

36

687

-

687

-

-

-

687
UPREIT units converted to REIT common shares

1

28

-

28

(28)

-

-

-
Change in fair value of interest rate swaps

-

-

-

-

-

-

6

6
Net income

-

-

1,213

1,213

2,312

(55)

-

3,470
BALANCE AT SEPTEMBER 30, 2019

9,320

$ 129,123

$ (27,809)

$ 101,314

$ 176,413

$ 2,437

$ (16)

$ 280,148


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

	(in thousands)
BALANCE AT DECEMBER 31, 2019	9,436	$ 131,261	($ 28,888)	$ 102,373	$ 174,221	$ 2,416	$ 37	$ 279,047
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-	-	-	-	9,031	-	-	9,031
Shares/units redeemed	(38)	(696)	-	(696)	(541)	-	-	(1,237)
Dividends 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 (loss)	-	-	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 and distributions 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 and distributions 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 (loss)	-	-	1,844	1,844	3,450	(28)	-	5,266
BALANCE AT SEPTEMBER 30, 2020	9,737	$ 136,887	($ 30,677)	$ 106,210	$ 178,881	$ 2,401	($ 2,088)	$ 285,404

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED September 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)


	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
OPERATING ACTIVITIES
Net income	$	16,890	$	12,081	$	19,832	$	16,890
Adjustments to reconcile net income to net cash from operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale of real estate investments		(1,456)		—		(1,710)		(1,456)
Gain on involuntary conversion		(52)		487		(1,236)		(52)
Equity in income of unconsolidated affiliates		(363)		(629)
Equity in loss (income) of unconsolidated affiliates						183		(363)
Distributions of earnings of unconsolidated affiliates		363		629		174		363
Allowance for uncollectible accounts receivable		52		125		502		52
Depreciation		14,716		14,785		15,665		14,716
Amortization		1,095		1,390		971		1,095
Amortization of debt issuance costs		463		465		402		463
Effects on operating cash flows due to changes in				��
Other assets		2,389		1,908		(1,160)		2,389
Tenant security deposits payable		380		150		298		380
Accrued expenses and other liabilities		1,511		2,624		(1,081)		1,511
NET CASH PROVIDED BY OPERATING ACTIVITIES		35,988		34,015		32,840		35,988
INVESTING ACTIVITIES
Purchase of real estate investment properties		(8,397)		—		(35,893)		(11,622)
Capital expenditures and tenant improvements		(24,662)		(8,935)		(13,629)		(24,662)
Proceeds from sale of real estate investments and non-real estate investments		5,483		—		5,590		5,483
Proceeds from involuntary conversion		1,077		1,513		4,095		1,077
Proceeds from sale of joint venture interest						—		—
Investment in unconsolidated affiliates		(1,170)		(1,323)		(5,845)		(1,170)
Distributions in excess of earnings received from unconsolidated affiliates		239		(32)		—		239
Notes receivable issued		(743)		(1,106)
Notes receivable issued net of payments received						(3,430)		(743)
NET CASH USED IN INVESTING ACTIVITIES		(28,173)		(9,883)		(49,112)		(31,398)
FINANCING ACTIVITIES
Payments for financing, debt issuance and lease costs		(349)		(27)
Payments for financing, debt issuance						(700)		(349)
Payments on investment certificates and subordinated debt		(50)		—		(25)		(50)
Principal payments on special assessments payable		(290)		(245)		—		(290)
Proceeds from issuance of mortgage notes payable and subordinated debt		22,910		—		71,530		26,135
Principal payments on mortgage notes payable		(15,249)		(16,330)		(30,360)		(15,249)
Proceeds from issuance of shares under optional purchase plan		2,579		2,411		3,013		2,579
Shares/units redeemed		(2,786)		(1,573)		(4,465)		(2,786)
Dividends/distributions paid		(17,012)		(16,333)		(17,309)		(17,012)
NET CASH USED IN FINANCING ACTIVITIES		(10,247)		(32,097)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES						21,684		(7,022)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS		(2,432)		(7,965)		5,412		(2,432)
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD		17,382		30,065		27,635		17,382
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD	$	14,950	$	22,100	$	33,047	$	14,950

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD
Cash and cash equivalents	$	6,499	$	13,685	$	22,168	$	6,499
Restricted deposits		8,451		8,415		10,879		8,451
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD	$	14,950	$	22,100	$	33,047	$	14,950

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE NINE MONTHS ENDED September 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)


	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	12,381	$	13,417	$	12,812	$	12,381

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	4,836	$	4,591	$	5,108	$	4,836
Dividends declared and not paid		2,577		2,435		2,707		2,577
UPREIT distributions declared and not paid		4,825		4,655		4,836		4,825
UPREIT units converted to REIT common shares		—		28
Shares issued pursuant to trustee compensation plan		64		62		57		64
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		9,031		—		2,883		9,031
Increase in land improvements due to increase in special assessments payable		72		213		204		72
Unrealized (loss) gain on interest rate swaps		(2,125)		14
Acquisition of assets with new financing		3,225		—
Unrealized gain (loss) on interest rate swaps						1,473		(2,125)
Acquisition of assets through assumption of debt and liabilities		538		—		569		538
Capitalized interest and real estate taxes related to construction in progress		524		55		200		524

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)

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

Note 1 - Organization

Sterling previously established an ~~operating partnership~~Operating Partnership (“Sterling Properties, 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.~~Operating Partnership. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, Sterling owned approximately ~~34.82%~~35.89% and ~~34.63%~~35.03%, respectively, of the ~~operating partnership.~~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.~~2021. These adjustments are of a normal recurring nature.

For a complete set of the Company’s significant accounting policies, refer to Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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 September 30, 2021, the Trust owned approximately 35.89% 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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

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

~~Table~~In instances where the Trust determines that it is not the primary beneficiary of ~~Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Dollar amounts~~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 ~~thousands, except share~~earnings (loss) of unconsolidated entity on its consolidated statements of operations and ~~per share data)~~

~~Principal Business Activity~~comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated entity on the consolidated balance sheets. See Note 5 for additional details regarding variable interest entities where the Trust uses the equity method of investing.

~~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.~~

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.~~Operating Partnership

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~~statements. Estimates and assumptions also affect 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 acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, and (v) assumed financing that is determined to be above or below market, if any. Transaction costs related to acquisitions accounted for as asset acquisitions are capitalized as incurred and included as a cost of the ~~Building~~building in the accompanying balance sheet.

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

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

vacant 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. Furniture and fixtures are included in the accompying consolidated balance sheets. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense 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~~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 indicators on each property, 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 months ended September 30, ~~2020~~2021 and ~~2019.~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

~~Properties Held for Sale~~

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

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

●

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

●

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

●

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

●

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

●

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

●

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

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

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

~~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 months ended September 30, 2020 and 2019.

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

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

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

We follow FASB ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, ~~2020~~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, 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 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 estate rental income” along with the associated base rent in the accompanying consolidated financial statements.

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted sowith the purpose 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~~$167 and ~~$39~~deceased revenue $31 for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The straight-line rent adjustment increased revenue by $359 and decreased revenue by $169 ~~and increased revenue by $17~~for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 was ~~$2,982~~$3,377 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.~~

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)

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

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.

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, 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, 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 and 9,208,000, 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~~

~~Recent Accounting Pronouncements~~

~~In March 2020, the FASB issued ASU No. 2020-04,~~ ~~Reference Rate Reform (Topic 848).~~ The standard provides for optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. On July 27, 2017, the Financial Conduct Authority (FCA), tasked with overseeing the London Interbank Offered Rate (LIBOR) announced the benchmark interest rate will be phased out by the end of 2021. As a result, existing and future contracts indexed to LIBOR will need to be renegotiated to reference another rate.

We adopted the standard effective as of January 1, 2020, using the optional transition method to apply the standard as of the effective date. The Trust elected to apply the optional expedients for all of the Trust’s hedging relationships. The Trust will disregard the potential change in the designated hedged risk that may occur due to reference rate reform when the Trust assesses whether the hedged forecasted transaction is probable in accordance with the requirements of Topic 815. The Trust will continue current hedge accounting for our existing cash flow hedges when the hedged risk changes by assuming the reference rate will not be replaced for the remainder of the hedging relationships for our assessment of hedge effectiveness and all subsequent hedge effectiveness assessments.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842),~~ which superseded FASB ASC Topic 840. The standard for operating leases as lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating and finance leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term.

We adopted this standard effective as of January 1, 2019, using the optional transition method to apply the standard as of the effective date. The 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.

In April 2020, the FASB met to discuss lease modifications guidance in Topic 842 as it relates to lease concessions amidst the COVID-19 pandemic. The FASB determined that requiring the analysis of all leases in which concessions are made would be costly and complex for both the lessees and lessors. As such, the FASB has made the decision to allow companies to avoid lease modification accounting when lease concessions do not result in a significant change in cash flow. The Trust has elected to apply the lease modification guidance in Topic 842 for concessions and deferrals made during the COVID-19 pandemic as it relates to the Trust’s residential leases, as the cash flows related to these concessions and deferrals do not cause a significant change in the cash received from the leases.

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

NOTE 3 – segment reporting

We report our results in 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~~income from rental operations less ~~real estate~~total segment expenses from rental operations (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization and certain general and administrative expenses. ~~The accounting policies of each segment are consistent with those described in Note 2 of this report.~~

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~~2021 and ~~2019,~~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 September 30, 2020						Three months ended September 30, 2019						Three months ended September 30, 2021						Three months ended September 30, 2020

	Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)						(in thousands)						(in thousands)
Income from rental operations	$	24,858	$	6,008	$	30,866	$	23,662	$	6,511	$	30,173	$	27,838	$	5,215	$	33,053	$	24,858	$	6,008	$	30,866
Expenses from rental operations		13,506		1,796		15,302		13,570		1,810		15,380		15,352		2,321		17,673		13,506		1,796		15,302
Net operating income	$	11,352	$	4,212	$	15,564	$	10,092	$	4,701	$	14,793	$	12,486	$	2,894	$	15,380	$	11,352	$	4,212	$	15,564
Depreciation and amortization						5,328						5,322						5,551						5,328
Interest						4,187						4,521						4,671						4,187
Administration of REIT						972						969						1,007						972
Other (income)/expense						(189)						511
Other (income)expense																		(1,567)						(189)
Net income					$	5,266					$	3,470					$	5,718					$	5,266


	Nine months ended September 30, 2021						Nine months ended September 30, 2020
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Income from rental operations	$	80,028	$	16,708	$	96,736	$	73,234	$	18,359	$	91,593
Expenses from rental operations		42,564		5,515		48,079		39,978		5,124		45,102
Net operating income	$	37,464	$	11,193	$	48,657	$	33,256	$	13,235	$	46,491
Depreciation and amortization						16,634						15,826
Interest						13,261						12,761
Administration of REIT						3,267						3,218
Other income						(4,337)						(2,204)
Net income					$	19,832					$	16,890

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)

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

Segment Assets and Accumulated Depreciation


As of September 30, 2021	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	688,151	$	203,280	$	891,431
Accumulated depreciation		(129,054)		(45,034)		(174,088)
	$	559,097	$	158,246		717,343
Cash and cash equivalents						22,168
Restricted deposits						10,879
Investment in unconsolidated affiliates						15,147
Notes receivable						5,456
Intangible assets, less accumulated amortization						6,519
Other assets, net						10,888
Total Assets					$	788,400


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						15,919
Investment in unconsolidated affiliates						9,659
Notes receivable						2,026
Assets held for sale						831
Intangible assets, less accumulated amortization						7,367
Other assets, net						10,798
Total Assets					$	743,029

NOTE 4 – Restricted deposits


	As of September 30,		As of December 31,
	2021		2020

	(in thousands)
Tenant security deposits	$	5,034	$	4,730
Real estate tax and insurance escrows		1,491		2,058
Replacement reserves		2,090		2,137
Other funded reserves		2,264		6,994
	$	10,879	$	15,919

Included in other funded reserves are insurance proceeds of $2,264 that were received during the nine months ended September 30, 2021, and are held in an escrow reserve account per the agreement set in place with various lenders. Funds will be released as construction costs related to the insurance claims are incurred. No such proceeds were received as of December 31, 2020.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

NOTE 5 – Investment in unconsolidated affiliates


Unconsolidated Affiliates	Date Acquired	Trust Ownership Interest		Total Investment in Unconsolidated Affiliates
Banner Building	2007	66.67%	$	60
Grand Forks INREIT, LLC	2003	50%		2,508
SE Savage, LLC	2019	60%		2,925
SE Maple Grove, LLC	2019	60%		2,886
SE Rogers, LLC	2020	60%		3,013
ST Oak Cliff, LLC	2021	70%		3,075
SE Brooklyn Park, LLC	2021	60%		680
			$	15,147

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, 2021 and December 31, 2020 of $6,076 and $6,232, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns 50% interest as tenant in common through 100% ownership in a limited liability company. The property 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, 2021 and December 31, 2020 of $9,856 and $10,036, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company that holds a 190-unit multifamily property. As of September 30, 2021, the Operating Partnership has contributed $2,077 in cash to the LLC. The LLC is located in Savage, Minnesota, with total assets of $37,256 and $27,015 as of September 30, 2021 and December 31, 2020, respectively. The development was completed in the third quarter of 2021. The property is encumbered by a first mortgage with a balance at September 30, 2021 and December 31, 2020, of $26,210 and $19,436, respectively. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at September 30, 2021 of $4,835. 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 September 30, 2021, the Operating Partnership has contributed $2,975 in cash to the LLC. The LLC is located in Maple Grove, Minnesota, with total assets of $29,424 and $13,106 as of September 30, 2021 and December 31, 2020, respectively. At its current projection, the development is expected to be completed in the fourth quarter of 2021 and the current project budget approximates $33,029 of which $27,907 has been incurred as of September 30, 2021. The property is encumbered by a first mortgage with a balance at September 30, 2021 and December 31, 2020 of $23,107 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 is currently developing a 165-unit multifamily property. As of September 30, 2021, the Operating Partnership has contributed $3,089 in cash to the LLC. The LLC holds land located in Rogers, Minnesota, with total assets of $17,818 and $4,161 as of September 30, 2021 and December 31, 2020, respectively. At its current projection, the development is expected to be completed in the second quarter of 2022 and the current project budget approximates $35,042 of which $16,530 has been incurred as of September 30, 2021. The property is encumbered by a first mortgage that has a balance of $10,993 at September 30,2021. There was 0 balance outstanding related to the first mortgage at December 30, 2020. The Company is jointly and severally liable for the full mortgage balance.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

On August 25, 2021, the Trust purchased a 70% interest in a limited liability company, with a related party. The LLC is currently developing a 318-unit multifamily property. As of September 30, 2021, the Operating Partnership has contributed $3,075 in cash to the LLC. The entity holds land located in Dallas, Texas with total assets of $4,653 as of September 30, 2021. At its current projection, the development is expected to be completed in the third quarter of 2023 and the current project budget approximates $53,138 of which $4,342 has been incurred as of September 30, 2021. The property is encumbered by a construction mortgage. There was 0 balance outstanding related to the mortgage at September 30, 2021. The Company is jointly and severally liable for the full mortgage balance.

On September 17, 2021, the Trust purchased a 60% interest in a limited liability company, with an unrelated third party. The LLC is currently developing a 146-unit multifamily property. As of September 30, 2021, the Operating Partnership has contributed $680 in cash to the LLC. The property is located in Brooklyn Park, Minnesota, with total assets of $2,371 of September 30, 2021. At its current projection, the development is expected to be completed in the second quarter of 2023 and the current project budget approximates $32,789 of which $2,370 has been incurred as of September 30, 2021.

The following is a summary of the financial position of the unconsolidated affiliates at September 30, 2021 and December 31, 2020.


		September 30, 2021		December 31, 2020

		(in thousands)
ASSETS
Real estate investments		$	121,916	$	74,991
Accumulated depreciation			(10,563)		(9,692)
	��		111,353		65,299
Cash and cash equivalents			878		249
Restricted deposits			493		384
Other assets, net			526		180
Total Assets		$	113,250	$	66,112

LIABILITIES
Mortgage notes payable, net		$	79,749	$	41,405
Tenant security deposits payable			97		2
Accrued expenses and other liabilities			8,072		6,533
Total Liabilities		$	87,918	$	47,940
SHAREHOLDERS' EQUITY
Total Shareholders' Equity		$	25,332	$	18,172

Total liabilities and shareholders' equity		$	113,250	$	66,112

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 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 and nine months ended September 30, 2021


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)					(in thousands)
Income from rental operations	$	1,296	$	812	$	3,109	$	2,453
Expenses from rental operations		417		182		999		614
Net operating income	$	879	$	630	$	2,110	$	1,839
Depreciation and Amortization		358		172		871		515
Interest		644		236		1,524		715
Other Income		(9)		-		(9)		(25)
Net (loss) income	$	(114)	$	222	$	(276)	$	634

Nine months ended September 30, 2020

Nine months ended September 30, 2019


Residential

Commercial

Total

Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
73,234

$
18,359

$
91,593

$
70,920

$
19,355

$
90,275
Expenses from rental operations

39,978

5,124

45,102

39,954

5,485

45,439
Net operating income

$
33,256

$
13,235

$
46,491

$
30,966

$
13,870

$
44,836
Depreciation and amortization

15,826

16,213
Interest

12,761

13,819
Administration of REIT

3,218

3,051
Other (income)/expense

(2,204)

(328)
Net income

$
16,890

$
12,081

~~Segment Assets and Accumulated Depreciation~~

As of September 30, 2020

Residential

Commercial

Total

(in thousands)
Real estate investments

$
637,741

$
204,275

$
842,016
Accumulated depreciation

(114,955)

(44,199)

(159,154)

$
522,786

$
160,076

682,862
Cash and cash equivalents

6,499
Restricted deposits and funded reserves

8,451
Investment in unconsolidated affiliates

8,846
Note receivable

2,043
Intangible assets, less accumulated amortization

7,671
Other assets, net

7,049
Total Assets

$
723,421

As of December 31, 2019

Residential

Commercial

Total

(in thousands)
Real estate investments

$
605,813

$
196,215

$
802,028
Accumulated depreciation

(104,170)

(42,146)

(146,316)

$
501,643

$
154,069

655,712
Cash and cash equivalents

9,002
Restricted deposits and funded reserves

8,380
Investment in unconsolidated affiliates

7,915
Note receivable

1,300
Intangible assets, less accumulated amortization

9,133
Other assets, net

8,244
Total Assets

$
699,686

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

NOTE 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 September 30, 2021							Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	20,197	$	(13,891)	$	6,306	$	16,002	$	(10,693)	$	5,309
Above-market leases		2,619		(1,254)		1,365		2,617		(1,407)		1,210
	$	22,816	$	(15,145)	$	7,671	$	18,619	$	(12,100)	$	6,519
Lease Intangible Liabilities
Below-market leases	$	(3,031)	$	1,987	$	(1,044)	$	(2,555)	$	1,699	$	(856)


	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		Intangible		Intangible
Years ending December 31,	Assets		Liabilities		Assets		Liabilities

	(in thousands)				(in thousands)
2020 (October 1, 2020 - December 31, 2020)	$	304	$	49
2021		1,121		184
2021 (October 1, 2021 - December 31, 2021)					$	273	$	45
2022		987		164		987		164
2023		849		151		849		151
2024		849		151		849		151
2025						849		151
Thereafter		3,561		345		2,712		194
	$	7,671	$	1,044	$	6,519	$	856

~~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~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)

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

NOTE 7 – LINES OF CREDIT

We have 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 December 2022. The lines of credit are secured by specific properties. At September 30, 2021, the Bremer line of credit secured 2 letters of credit totaling $67, leaving $9,848 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. There were 0 balances outstanding on either line as of September 30, 2021 or December 31, 2020.

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 compliance with all measured debt covenants. As of December 31, 2019, 3 residential properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. An annual waiver was received from the lender.

NOTE 68 - MORTGAGE NOTES PAYABLE

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


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

	(in thousands)				(in thousands)
Fixed rate mortgage notes payable (a)	$	405,924	$	395,038	$	457,071	$	415,665
Variable rate mortgage notes payable						7,210		7,446
Mortgage notes payable						464,281		423,111
Less unamortized debt issuance costs		1,810		1,874		2,131		1,833
	$	404,114	$	393,164	$	462,150	$	421,278

(a)	Includes ~~$31,017~~$69,490 and ~~$12,960~~$43,613 of variable rate mortgage debt that was swapped to a fixed rate at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

~~As of September 30, 2020, we had 119 mortgage loans with effective interest rates ranging from 2.43% to 6.85% per annum and a weighted average effective interest rate of 4.13% per annum.~~

~~As of December 31, 2019, we had 121 mortgage loans with effective interest rates ranging from 3.15% to 7.25% per annum, and a weighted average effective interest rate of 4.31% per annum.~~

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 covenants as of September 30, 2020; however, we have not received any notice of non-compliance with our covenants through the date of this filing. As of December 31, 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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

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


Years ending December 31,	Amount		Amount
	(in thousands)		(in thousands)
2020 (October 1, 2020 - December 31, 2020)	$	8,126
2021		27,580
2021 (October 1, 2021 - December 31, 2021)			$	5,589
2022		25,841		27,983
2023		49,115		51,310
2024		18,076		20,840
2025				51,244
Thereafter		277,186		307,315
Total payments	$	405,924	$	464,281

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~~counterparty; In exchange, ~~for~~ the Trust ~~making~~makes fixed rate payments over the life of the agreement without exchange of the underlying notional amount.

As of September 30, 2020, the Trust used 8 interest rate swaps to hedge the variable cash flows associated with 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 months, the Trust estimates that an additional $93 will be reclassified as an increase to interest expense.

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

Fixed

Effective Date

Notional

Interest Rate

Maturity Date
November 1, 2019
$
7,026

3.15%

November 1, 2029
November 1, 2019
$
4,881

3.28%

November 1, 2029
January 10, 2020
$
3,171

3.39%

January 10, 2030
June 12, 2020
$
1,590

3.07%

June 15, 2030
June 12, 2020
$
3,081

3.07%

June 15, 2030
June 15, 2020
$
1,724

2.94%

June 15, 2030
June 15, 2020
$
4,561

2.94%

June 15, 2030
July 1, 2020
$
4,983

2.79%

June 10, 2030

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

Number of Instruments

Notional
Interest Rate Derivatives

September 30, 2020

December 31, 2019

September 30, 2020

December 31, 2019
Interest rate swaps

8

3
$
31,017
$
12,960

The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the accompanying consolidated balance sheets. The valuation techniques are described in Note 8 to the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~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

As of September 30, 2021, the Trust used 10 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 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 twelve months, the Trust estimates that an additional $869 will be reclassified as an increase to interest expense.

The following table summarizes the Trust’s interest rate swaps as of September 30, 2021, which effectively convert one month floating rate LIBOR to a fixed rate:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
November 1, 2019	$	6,830	3.15%	November 1, 2029
November 1, 2019	$	4,746	3.28%	November 1, 2029
January 10, 2020	$	3,087	3.39%	January 10, 2030
June 11, 2020	$	1,547	3.07%	June 15, 2030
June 11, 2020	$	2,997	3.07%	June 15, 2030
June 15, 2020	$	1,676	2.94%	June 15, 2030
June 15, 2020	$	4,435	2.94%	June 15, 2030
July 1, 2020	$	4,879	2.79%	June 10, 2030
December 2, 2020	$	12,800	2.91%	December 2, 2027
July 1, 2021	$	26,493	2.99%	July 1, 2031

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


	Number of Instruments			Notional
Interest Rate Derivatives	September 30, 2021	December 31, 2020		September 30, 2021		December 31, 2020
Interest rate swaps	10	9	$	69,490	$	43,613


	Derivatives
Derivatives designated as	September 30, 2021			December 31, 2020
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	524	Other assets, net	$	—
Interest rate swaps	Accrued expenses and other liabilities	$	856	Accrued expenses and other liabilities	$	1,805

The carrying ~~amount~~amounts of the swaps have been adjusted to their fair value at the end of the ~~quarter, which because~~quarter. Because of changes in forecasted levels of LIBOR, ~~resulted in reporting~~an asset and a liability for the fair value of the future net payments forecasted under the ~~swap.~~swap were reported. The interest rate ~~swap is~~swaps are accounted for as an effective ~~hedge~~hedges in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

The following table presents the effect of the Trust’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the ~~quarters~~three months ended September 30, ~~2020 and 2019:~~2021and 2020:



			Location of Gain					Location of Gain
		Amount of (Gain)/Loss	Reclassified from		Amount of (Gain)/Loss		Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Reclassified from		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		AOCI into Income		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		Nine Months Ended		on Derivatives	(AOCI) into Income		AOCI into Income
		2020			2020		2021			2021
Interest rate swaps	$	2,125	Interest expense	$	145	$	66	Interest expense	$	199
		2019			2019		2020			2020
Interest rate swaps	$	(14)	Interest expense	$	22	$	17	Interest expense	$	89



			Location of Gain
		Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		AOCI into Income
		2021			2021
Interest rate swaps	$	(1,473)	Interest expense	$	433
		2020			2020
Interest rate swaps	$	2,125	Interest expense	$	145

Credit-risk-related Contingent Features

The Trust has agreements with each of its derivative counterparties ~~that contain~~containing 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,~~2021, the termination value of derivatives in a liability position ~~which includes accrued interest~~was $856 and ~~adjustment for non-performance risk, which~~ the ~~Trust has deemed not significant,~~termination value of derivatives in an asset position was ~~$2,088.~~$524. As of September 30, ~~2020,~~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~~collateral.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (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 financial instruments:


	September 30, 2020				December 31, 2019				September 30, 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
Notes receivable									$	5,456	$	6,642	$	2,026	$	2,117
Derivative assets	$	—	$	—	$	58	$	58	$	524	$	524	$	—	$	—

Financial liabilities:
Mortgage notes payable, net	$	404,114	$	439,341	$	393,164	$	415,183
Mortgage notes payable									$	464,281	$	486,276	$	421,278	$	443,100
Derivative liabilities	$	2,088	$	2,088	$	21	$	21	$	856	$	856	$	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 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 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
September 30, 2021
Derivative assets	$	—	$	58	$		$	58	$	—	$	524	$	—	$	524
Derivative liabilities	$	—	$	21	$	—	$	21	$	—	$	856	$	—	$	856

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 the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~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 financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

Level 1

Level 2

Level 3

Total

(in thousands)
September 30, 2020

Mortgage notes payable, net

$
—

$
—

$
439,341

$
439,341
Note receivable

$
—

$
—

$
2,156

$
2,156
December 31, 2019

Mortgage notes payable, net

$
—

$
—

$
415,183

$
415,183
Note receivable

$
—

$
—

$
1,389

$
1,389


	Level 1		Level 2		Level 3		Total

	(in thousands)
September 30, 2021
Mortgage notes payable	$	—	$	—	$	486,276	$	486,276
Notes receivable	$	—	$	—	$	6,642	$	6,642
December 31, 2020
Mortgage notes payable	$	—	$	—	$	443,100	$	443,100
Notes receivable	$	—	$	—	$	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 for similar debt instruments of comparable maturities by the Trust’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%~~3.00% to ~~3.20%~~3.10% and from ~~3.75%~~3.25% to ~~3.80%~~3.35% at September 30, ~~2020~~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: 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%~~3.00% to ~~3.20%~~3.50% and from ~~3.75%~~3.25% to ~~3.80%~~3.35% at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

NOTE 11 – LEASES

As of September 30, 2021, we derived 83% 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 September 30, 2021, we derived 17% 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.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)

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

~~NOTE 9 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP~~Lease income related to the Company’s operating leases is comprised of the following:

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


	Three months ended September 30, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	26,748	$	3,879	$	30,627
Lease income related to variable lease payments		—		1,130		1,130
Other (a)		(35)		174		139
Lease Income (b)	$	26,713	$	5,183	$	31,896

~~During the nine months ended September 30, 2020 there were 0 limited partnership units exchanged for common shares pursuant to redemption requests.~~


	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

~~At the sole and absolute discretion of the limited partnership, and so long as our redemption plans exist, and applicable holding periods are met,~~Limited Partners may request the operating partnership redeem their limited partnership units. The operating partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, (2) offer shares in lieu of cash for the redemption on a basis of 1 limited partnership unit for one Sterling common share (the “Exchange Request”). The Exchange Request shall be exercised pursuant to a Notice of Exchange. If the issuance of Sterling common shares pursuant to an Exchange Request will cause the shareholder to exceed the ownership limitations, among other reasons, payment will be made to the Limited Partner in cash. No Limited Partner may exercise an Exchange Request more than ~~twice~~ during any calendar year, and Exchange Requests may not be made for less than 1,000 limited partnership units. If a Limited Partner owns fewer than 1,000 limited partnership units, all of the limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.

(a)

For the three months ended September 30, 2021 and 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 three months ended September 30, 2021 and 2020 of $1,157 and $1,010, respectively, which is accounted for under the revenue recognition standard.

~~NOTE 10 – REDEMPTION PLANS~~


	Nine months ended September 30, 2021
	Residential		Commercial		Total

	(in thousands)
Lease income related to fixed lease payments	$	76,722	$	12,531	$	89,253
Lease income related to variable lease payments		—		3,424		3,424
Other (a)		(212)		432		220
Lease Income (b)	$	76,510	$	16,387	$	92,897

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans. Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $40,000 worth of securities. Currently, the fixed redemption price is $18.25 per share or unit under the plans, which price became effective January 1, 2020. Prior to January 1, 2020, the redemption price was $18.00 per share or unit under the plan.


	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

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.

(a)

For the nine months ended September 30, 2021 and 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, 2021 and 2020 of $3,839 and $2,969, respectively, which is accounted for under the revenue recognition standard.

During the nine months ended September 30, 2020 and 2019, the Trust redeemed 101,000 and 33,000 common shares valued at $1,853 and $593, respectively. In addition, during the nine months ended September 30, 2020 and 2019, the Trust redeemed 52,000 and 55,000 units valued at $933 and $980, respectively.

~~NOTE 11 – BENEFICIAL INTEREST~~

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of September 30, 2020 and December 31, 2019, there were 9,737,000 and 9,436,000 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~~sEPTEMBER 30, ~~2020~~2021 and ~~2019~~2020 (UNAUDITED)

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

~~Dividends paid to holders of common shares were $0.7941 per share and $0.7838 per share for the nine months ended September 30, 2020 and 2019, respectively.~~ As of September 30, ~~2020 and 2019,~~2021, non-cancelable commercial operating leases provide for future minimum rental income as follows. Residential leases are not included, as the ~~operating partnership declared dividends of $2,577 and $2,435 respectively, to holders of common shares which were paid on October 15, 2020 and 2019, respectively.~~terms are generally for one year or less.


Years ending December 31,	Amount
	(in thousands)
2021 (October 1, 2021 - December 31, 2021)	$	3,782
2022		15,061
2023		14,474
2024		13,856
2025		13,688
Thereafter		64,381
	$	125,242

~~NOTE 12 – DIVIDEND REINVESTMENT PLAN~~

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges. On July 20, 2012, we registered with the Securities Exchange Commission 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012. On July 11, 2017, we registered with the Securities Exchange Commission an additional 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 11, 2017. On June 25, 2020 our Board of Trustees approved of an additional 2,000,000 common shares to be issued under the dividend reinvestment plan. We plan to file a Form S-3D registration statement to register the additional shares with the Securities and Exchange Commission in the near future.

Under this plan, eligible shareholders may elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional optional cash purchases of our common shares, not to exceed $10 per fiscal quarter without our prior approval. The purchase price per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional optional cash purchases, as determined by our Board of Trustees. In addition, eligible shareholders may not in any calendar year purchase or receive via transfer more than $40 additional optional cash purchases of Common Shares.

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

Therefore, the purchase price per common share for dividend reinvestments was $18.29 and $18.05 and for additional optional cash purchases was $19.25 and $19.00 at September 30, 2020 and December 31, 2019, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten-day notice to participants.

In the nine months ended September 30, 2020, 265,000 shares were issued pursuant to dividend reinvestments and 134,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $4,836 and $2,579 respectively.

In the nine months ended September 30, 2019, 255,000 shares were issued pursuant to dividend reinvestments and 127,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $4,591 and $2,411 respectively.

NOTE 1312 – 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, Inc. In connection with this restructuring transaction, the owners of Alloy Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management, Inc. 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 and CIO Joel Thomsen, and by the Chief Financial Officer and Treasurer Erica J. Chaffee. In addition, Mr. Regan serves as the Executive Chairman of the Advisor and GOLDMARK Property Management, Inc., and Messrs. Wieland and Thomsen, and Ms. Chaffee serve on the Board of Governors of the Advisor and the Board of Directors of GOLDMARK Property Management, Inc.

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

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

We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. Mr. Wieland, a Trustee, also serves as a Board Member of Bell Bank. Further, a family member of Erica J. Chaffee, our Chief Financial Officer, is an employee of Bell Bank. Both Mr. Wieland and Ms. Chaffee could have an indirect material interest in any such engagement and related transactions.

Property Management Fees

During the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, we paid property management ~~fees~~ and administrative fees to GOLDMARK Property Management, Inc. ~~GOLDMARK Property~~of $9,634 and $9,518, respectively. Management ~~is owned in part by Kenneth Regan, James Wieland~~fees which approximate 5% of net collected rents, account for $3,862 and ~~Joel Thomsen. For~~$3,692 of these fees during the nine months ended September 30, 2021 and 2020, respectively. In addition, during the nine months ended September 30, 2021 and ~~2019,~~2020, we paid ~~management fees, on-site staff costs~~repair and ~~other miscellaneous fees required to run the property of $9,518~~maintenance expenses, and ~~$9,530, respectively,~~payroll related expenses to GOLDMARK Property Management, Inc. ~~Management~~totaling $5,012 and $4,849, respectively.

During the nine months ended September 30, 2021, the Trust paid commercial property management fees to our Advisor of $87. There were 0 commercial property management fees paid during the nine months ended September 30, 2020 ~~and 2019, approximated 5% of net collected rents. In addition, during the nine months ended September 30, 2020 and 2019,~~to our advisor. Commercial property management fees are determined on a property by property basis.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~sEPTEMBER 30, ~~2020~~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~~Property management fees of $49 and $44 during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, and December 31, 2019 we owed our Trustees $14 and $29 for unpaid board of trustee fees, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees specific amounts for meetings attended.

~~The plan provides:~~



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

~~Common shares earned~~are included 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 serviceoperating expenses on the ~~Board or Committees.~~ consolidated statement of operations.

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have 0 paid employees. The ~~following is a brief description~~Advisor may receive fees related to management of the ~~current~~Trust, acquiring, disposing, or developing real estate property, project management fees, and ~~compensation that may be received by the Advisor~~financing fees related to lending relationships, under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March ~~26, 2020,~~24, 2021, and is effective until March 31, ~~2021.~~2022.

~~Management Fee~~~~: 0.35% of our total assets (before depreciation and amortization)~~Effective April , 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 of2021, if the Advisor ~~not to exceed one-twelfth of 0.35% of~~shares responsibility for providing Development Services with one or more third parties, Advisor’s set Development Fee shall be reduced by the ~~total assets as of the last day of the immediately preceding month. The management fee calculation~~fees charged by any such third parties; provided, such adjustment is subject to ~~quarterly and annual reconciliations. The management fee may be deferred at the option of~~a 2.5% minimum Advisor’s Development Fee. Additionally, in cases where the Advisor ~~without interest.~~

~~During~~is sharing responsibility for providing Development Services, 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~~Development Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by a majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

During the 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~~~~: 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~~: 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~~2.5% of ~~credit or other credit facility.~~$20,000,000 ($500,000).

~~During~~The below table summarizes 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~~and payable to our ~~Advisor as of December 31, 2019.~~

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

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


	Nine months ended				Due and Payable at
	September 30, 2021		September 30, 2020		September 30, 2021		December 31, 2020
	Fee		Fee		Payable		Payable

	(in thousands)
Fee:
Advisory	$	2,474	$	2,321	$	285	$	278
Acquisition	$	375	$	500	$	-	$	-
Disposition	$	146	$	143	$	-	$	175
Financing	$	146	$	82	$	5	$	-
Development	$	-	$	-	$	79	$	79
Project Management	$	409	$	226	$	11	$	51

~~Development Fee~~~~: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.~~


~~Total Cost~~	~~Fee~~		~~Range of Fee~~	~~Formula~~
~~0 – 10M~~	~~5.0~~	%	~~0 –.5M~~	~~0M – 5.0% x (TC – 0M)~~
~~10M - 20M~~	~~4.5~~	%	~~.5 M – .95M~~	~~.50M – 4.5% x (TC – 10M)~~
~~20M – 30M~~	~~4.0~~	%	~~.95 M – 1.35M~~	~~.95M – 4.0% x (TC – 20M)~~
~~30M – 40M~~	~~3.5~~	%	~~1.35 M – 1.70M~~	~~1.35M – 3.5% x (TC – 30M)~~
~~40M – 50M~~	~~3.0~~	%	~~1.70 M – 2.00M~~	~~1.70M – 3.0% x (TC – 40M)~~

~~TC = Total Project Cost~~

During the nine months ended September 30, 2020 we incurred development fees of $715 with our Advisor. During the nine months ended September 30, 2019, 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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

Operating Partnership Units Issued in Connection with Acquisitions

During the nine months ended September 30, 2021, there were 0 Operating Partnership units issued directly or indirectly, to affiliated entities.

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

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

Commissions

During the nine months ended September 30, 2021 and 2020, we incurred real estate commissions of $297 and $583, respectively, to GOLDMARK Commercial Real Estate, ~~Services,~~ Inc., in which ~~is controlled by~~ Messrs. Regan and ~~Wieland. During the nine months ended September 30, 2019, there were 0 commissions incurred with GOLDMARK Commercial Real Estate Services, Inc..~~Wieland jointly own a controlling interest. As of September 30, ~~2020, we owed $250 in commissions to GOLDMARK Commercial Real Estate Services, Inc. As of~~2021 and December ~~31, 2019,~~30, 2020, there were 0 unpaid commissions to GOLDMARK Commercial Real ~~Estate Services, Inc.~~Estate.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

During the nine months ended September 30, 2021 and 2020, we incurred real estate commissions of $217 and $308, respectively to ~~GOLDMARK Property Management, which is controlled by Messrs. Regan, Wieland and Thomsen. During the nine months ended September 30, 2019, there were 0 commissions incurred with~~ GOLDMARK Property Management. As of September 30, ~~2020, we owed $308 in commissions to GOLDMARK Property Management. As of~~2021 and December ~~31, 2019,~~30, 2020, there were 0 unpaid commissions to GOLDMARK Property Management.

Rental Income

During the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, we received rental income of ~~$63~~$77 and ~~$42,~~$63, respectively, under an operating lease agreement with our Advisor.

During the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, we received rental income of ~~$43~~$19 and ~~$42,~~$43, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate, ~~Services,~~ Inc.

During the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, we received rental income of ~~$202~~$224 and ~~$173,~~$202, respectively, under operating lease agreements with GOLDMARK Property ~~Management.~~Management, Inc.

During the nine months ended September 30, 2021 and 2020, we received rental income of $278 and $362, respectively, under operating lease agreements with Bell Bank.

Other operational costs

During the nine months ended September 30, 2021 and 2020, the Trust incurred $187 and $1,575, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. At September 30, 2021 and December 31, 2020, operational outstanding liabilities were $62 and $191, respectively.

During the nine months ended September 30, 2021, the Trust received $1,000 from related parties, in reimbursement for expenses paid that were associated with capital projects. NaN reimbursements were received during the nine months ending September 30, 2020.

Debt Financing

At September 30, 2021 and December 31, 2020, the Trust had $66,915 and $51,915, respectively, of outstanding principal on loans entered into with Bell Bank. During the nine months ended September 30, 2021 and 2020, the Trust incurred interest expense on debt held with Bell Bank of $1,511 and $1,571, respectively. Accrued interest as of September 30, 2021 and December 31, 2020, related to this debt was $142 and $121, respectively.

Mezzanine Financing

As of September 30, 2021, Sterling issued $4,835 in second mortgage financing to SE Savage, LLC. There was 0 outstanding receivable at December 31, 2020.

During the nine months ended September 30, 2021, the Trust earned interest income of $103 related to the second mortgage financing to SE Savage, LLC. NaN interest income was earned during the nine months ended September 30, 2020.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

Insurance Services

On November 1, 2020, the Operating Partnership obtained a traditional insurance policy with Bell Insurance. The policy provides coverage for the Trust’s Commercial segment. As of September 30, 2021, total premiums incurred for this policy was $118. There was 0 such policy in place with Bell Bank as of September 30, 2020.

Development Arrangements

Effective August 25, 2021, the Operating Partnership purchased a 70% interest in ST Oak Cliff Dallas, LLC. The purpose of the entity is to develop and construct a 318 unit multifamily property located in Dallas, Texas. The 30% owner, TG Oak Cliff Dallas, LLC is owned in part by Kenneth P. Regan, the Trust’s Chief Executive Officer and Trustee. Mr. Regan is also a member in Trumont Group, LLC, the developer engaged by ST Oak Cliff Dallas, LLC to oversee the development of the property. Further, Mr. Regan is also a partner in Trumont Construction, LLC, the company who was engaged to oversee the day to day construction operations of the property.

During the nine months ended September 30, 2021, the Trust incurred and paid $51 in development fees to Trumont Group, LLC. NaN such fees were paid during the nine months ended September 30, 2020. At September 30, 2021 the Trust owed $51 in development fees to Trumont Group, LLC. At December 31, 2020, 0 development fees were owed to Trumont Group, LLC.

During the nine months ended September 30, 2021, the Trust incurred and paid $12 in construction fees to Trumont Construction, LLC. NaN such fees were paid during the nine months ended September 30, 2020. At September 30, 2021 the Trust owed $6 in construction fees to Trumont Construction, LLC. At December 31, 2020, 0 construction fees were owed to Trumont Construction, LLC.

During the nine months ended September 30, 2021, the Trust incurred and paid $41 in general construction costs to Trumont Construction, LLC. NaN such fees were paid during the nine months ended September 30, 2020. At September 30, 2021 and December 31, 2020, 0 general construction costs were owed to Trumont Construction, LLC.

NOTE 1413 - 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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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

Risk of Uninsured Property Losses

We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

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

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~~impacts of the COVID-19, ~~cases in many states. The~~delta variant. While the Trust did not incur significant disruptions during the nine months ended September 30, ~~2020~~2021 from the COVID-19 ~~pandemic.~~ ~~During~~pandemic, the ~~quarter ended September 30, 2020,~~effects of the ~~Trust continued~~ongoing COVID-19 pandemic could have material adverse effects on our business and results of operations, so long as COVID-19 continues to ~~monitor state and federal legislative actions and efforts~~impact the U.S. economy in ~~regards to the eviction moratorium which affects almost all single-family~~general and multifamily ~~rental housing units.~~apartment communities in particular. The ~~Trust has seen a number of tenants complete~~extent to which 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~~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 ~~eviction moratorium will have on its future~~ ~~financial condition, results~~direct and indirect economic effects of ~~operations~~the pandemic and ~~cash flows~~ ~~due to numerous uncertainties~~containment measures, among others.

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 1514 – DISPOSITIONS

During the nine months ended September 30, 2021, the Operating Partnership sold 2 properties. We sold a retail property located in Waite Park, Minnesota, for a sale price of $900. Net proceeds received were $853 and the Trust recognized a gain of $2 in April 2021. We sold a residential property located in Moorhead, Minnesota, for a sale price of $4,950. Net proeeds received were $4,757 and the Trust recognized a gain of $1,708 in June 2021.

During the nine months ended September 30, 2020, the ~~operating partnership~~Operating Partnership sold 2 properties. We sold a retail property located in Apple Valley, Minnesota, for $3,670 and recognized a gain of $1,455 in March 2020. We sold an office property located in St. Cloud, Minnesota, for $2,050 and recognized a gain of $1 in May 2020. ~~During the nine months ended September 30, 2019, the operating partnership did~~ ~~not~~ ~~dispose of any properties.~~

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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 15 – ACQUISITIONS

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Purchase Price

6/1/21

Flagstone

Fargo, ND

Apartment Complex

120 units

7,789

6/1/21

Brownstone

Fargo, ND

Apartment Complex

72 units

4,392

6/1/21

Briar Pointe

Fargo, ND

Apartment Complex

30 units

1,936

7/1/21

Oxford

Fargo, ND

Apartment Complex

144 units

10,227

7/1/21

Pinehurst

Fargo, ND

Apartment Complex

210 units

15,001

39,345

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sEPTEMBER 30, 2021 and 2020 (UNAUDITED)

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

~~NOTE 16 – ACQUISITIONS~~

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

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

1/12/20

Wolf Creek

Fargo, ND

Apartment complex

54 units

$
4,968
1/31/20

Columbia Park Village

Grand Forks, ND

Apartment complex

12 units

612
3/1/20

Belmont East & West

Bismarck, ND

Apartment complex

26 units

1,494
3/1/20

Eastbrook

Bismarck, ND

Apartment complex

24 units

1,296
3/1/20

Hawn

Fargo, ND

Apartment complex

48 units

2,400
3/1/20

Rosser

Bismarck, ND

Apartment complex

24 units

1,296
8/28/20

Cargill Building (a)

Fargo, ND

Office building

45,755 sq. ft.

6,500
9/15/20

Foxtail Townhomes

Fargo, ND

Apartment complex

30 units

1,450

$
20,016

(b)

~~(a)~~

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

~~(b)~~

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

Total consideration given for acquisitions through September 30, ~~2020~~2021 was completed through issuing approximately ~~469,000~~144,000 limited partnership units of the ~~operating partnership~~Operating Partnership valued at ~~$19.25~~$20.00 per unit for an aggregate consideration of approximately ~~$9,031,~~$2,883, assumed liabilities of ~~$538, a mortgage~~$569, new debt of ~~$3,225, 1031 exchange funds of $5,658~~$26,250 and cash of ~~$2,739.~~$9,643. 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,~~of the asset acquisitions, the Trust recorded in conjunction with the acquisitions discussed ~~above:~~above, as of the acquisition date:

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~~ ~~and~~ ~~2019~~ ~~(UNAUDITED)~~

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

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

The Board determined the fair value of the shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020. The Board determined the fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019.

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

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

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


	Nine Months Ended
	September 30,
	2021		2020

Land, building, tenant improvements and FF&E	$	39,345	$	21,191
Other liabilities		(569)		(538)
Net assets acquired		38,776		20,653
Equity/limited partnership unit consideration		(2,883)		(9,031)
New loans		(26,250)		(3,225)

Net cash consideration	$	9,643	$	8,397

NOTE 1716 - SUBSEQUENT EVENTS

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

~~On October~~ 15, ~~2020,~~2021, we paid a dividend or distribution of ~~$0.26469~~$0.2650 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.~~2021.

~~Pending acquisitions and dispositions are subject~~On October 1, 2021, the Trust paid off a loan totaling $1,923. The property is unencumbered as of October 1, 2021.

On October 1, 2021, the Trust contributed $1,050 in additional equity to ~~numerous conditions and contingencies and there are no assurances that~~Bell Plaza. The Trust holds a 70% investing interest in the ~~transactions will be completed.~~property.

On October 8, 2021, the Trust issued $649 in second mortgage financing to SE Savage, LLC.

On October 8, 2021, the Trust made an additional equity contribution of $742 to SE Brooklyn Park, LLC.

On October 13, 2021, the Trust made an additional equity contribution of $385 to ST Oak Cliff Dallas, LLC.

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 2. through Item 4 and Part II Item 2. are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.

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

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

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

Overview

Sterling Real Estate Trust d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation. Our real estate portfolio consisted of ~~179~~182 properties containing ~~10,184~~10,788 apartment units and approximately ~~1,692,000~~1,612,000 square feet of leasable commercial space as of September 30, ~~2020~~2021. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately ~~$682,862,~~$717,343, 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~~Critical Accounting Estimates

~~Our operating partnership, Sterling Properties, LLLP, was formed~~Below are 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 ~~North Dakota limited liability limited partnership in April 2003~~result, are subject to ~~acquire, own~~a degree of uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated 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.~~utilized by management.

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AsImpairment 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 multifamily 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 located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. We have both single and multi-tenant properties in the commercial portfolio, most of which are under long-term leases.Real Estate Investments

~~Our Board~~The Trust’s investment properties are reviewed for potential impairment at the end of ~~Trustees and Executive Officers~~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.

~~We operate under the direction~~Examples of ~~our Board of Trustees, the members of which~~situations considered to be impairment indicators include, but 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.not limited to:

a substantial decline or negative cash flows;

continued low occupancy rates;

continued difficulty in leasing space;

significant financially troubled tenants;

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

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

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

~~Our Advisor~~

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

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.

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

projected capital expenditures;

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

comparable selling prices; and

property specific discount rates for fair value estimates as necessary.

~~Critical Accounting Estimates~~

~~Preparation of our financial statements requires estimates and judgments to be made that effect~~To the ~~amounts of assets, liabilities, revenues and expenses reported. Such decisions include~~extent impairment has occurred, the ~~selection~~Trust will record an impairment charge calculated as the excess of the ~~appropriate accounting principles to be applied~~carrying value of the asset over its fair value. Based on evaluation, there were no impairment losses during the nine months ended September 30, 2021 and ~~the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.~~2020.

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~~2021 included elsewhere in this report.

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~~Specific Achievements~~Principal Business Activity

Sterling currently owns directly and indirectly 182 properties. The Trust’s 137 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 45 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the Trust’s mix of properties is 77.2% residential and 22.8% commercial (based on cost) and total $717,343 in real estate investments at September 30, 2021. Sterling’s current acquisition strategy and primary focus is on multifamily apartment properties. We currently have no plans to actively market our existing commercial properties for sale. We will consider unsolicited offers for purchase of non-multifamily properties on a case by case basis.


Residential Property	Location	No. of Properties	Units
	North Dakota	117	6,954
	Minnesota	15	3,031
	Missouri	1	164
	Nebraska	4	639
		137	10,788

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	12	638,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		45	1,612,000

Results of Operations

Management Highlights

●

Increased revenues from rental operations by ~~$693~~$2,187 or ~~2.3%~~7.1% for the three months ended September 30, ~~2020,~~2021, compared to the same three month period in ~~2019.~~2020.

●

Increased revenues from rental operations by ~~$1,318~~$5,143 or ~~1.5%~~5.6% for the nine months ended September 30, ~~2020,~~2021, compared to same nine month period in ~~2019.~~2020.

●

Acquired ~~seven~~five residential properties during the nine months ended September 30, 2021.

●

Disposed of one residential 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.~~2021.

●

Declared dividends aggregating ~~$0.7941~~$0.7100 per common share for the nine months ended September 30, ~~2020.~~2021.

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


	Three months ended September 30, 2020						Three months ended September 30, 2019						Three months ended September 30, 2021						Three months ended September 30, 2020
	Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)						(unaudited)						(unaudited)
	(in thousands)						(in thousands)						(in thousands)						(in thousands)
Real Estate Revenues	$	24,858	$	6,008	$	30,866	$	23,662	$	6,511	$	30,173	$	27,838	$	5,215	$	33,053	$	24,858	$	6,008	$	30,866
Real Estate Expenses
Real Estate Taxes		2,486		674		3,160		2,343		693		3,036		2,743		746		3,489		2,486		674		3,160
Property Management		3,100		203		3,303		3,220		258		3,478		3,419		540		3,959		3,100		203		3,303
Utilities		1,776		287		2,063		1,708		309		2,017		1,990		350		2,340		1,776		287		2,063
Repairs and Maintenance		5,351		596		5,947		5,795		531		6,326		6,375		654		7,029		5,351		596		5,947
Insurance		793		36		829		504		19		523		825		31		856		793		36		829
Total Real Estate Expenses		13,506		1,796		15,302		13,570		1,810		15,380		15,352		2,321		17,673		13,506		1,796		15,302
Net Operating Income	$	11,352	$	4,212		15,564	$	10,092	$	4,701		14,793	$	12,486	$	2,894		15,380	$	11,352	$	4,212		15,564
Interest						4,187						4,521						4,671						4,187
Depreciation and amortization						5,328						5,322						5,551						5,328
Administration of REIT						972						969						1,007						972
Other (income)/expense						(189)						511
Other income																		(1,567)						(189)
Net Income					$	5,266					$	3,470					$	5,718					$	5,266

Net Income Attributed to:
Noncontrolling Interest					$	3,422					$	2,257					$	3,614					$	3,422
Sterling Real Estate Trust					$	1,844					$	1,213					$	2,104					$	1,844
Dividends per share⁽¹⁾					$	0.2647					$	0.2613					$	0.2650					$	0.2647
Earnings per share					$	0.19					$	0.13					$	0.21					$	0.19
Weighted average number of common shares						9,740						9,322						10,215						9,740

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

Revenues

Property revenues of ~~$30,866~~$33,053 for the three months ended September 30, ~~2020~~2021 increased ~~$693~~$2,187 or ~~2.3%~~7.1% in comparison to the same period in ~~2019.~~2020. Residential property revenues increased ~~$1,196~~$2,980 and commercial property revenues decreased ~~$503.~~$794.

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


	September 30,		September 30,		September 30,		September 30,
	2020		2019		2021		2020
Residential occupancy	93.2	%	93.9	%	94.4	%	93.2	%
Commercial occupancy					78.2	%	93.6	%

~~Table of Contents~~

Residential revenues for the three months ended September 30, ~~2020~~2021 increased ~~$1,196~~$2,980 or ~~5.1%~~12.0% in comparison to the same period for ~~2019.~~2020. Residential properties acquired since January 1, 2020 contributed approximately ~~$644~~$1,998 to the increase in total residential revenues in the three months ended September 30, ~~2020. The remaining increase is due to~~2021. Further, increased lease renewals, resulting in decreased rental incentives ~~due~~contributed to ~~increased renewals,~~the rental income increase as well as 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. The overall residential income increase was offset by increased vacancy, primarily in our Minneapolis, Minnesota market.properties. Residential revenues comprised 84.2% of total revenues for the three months ended September 30, 2021 compared to 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%. 2020.

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For the three months ended September 30, ~~2020,~~2021 total commercial revenues decreased ~~$503~~$793 or ~~7.7%~~13.2% in comparison to the same period for ~~2019. Vacant office space in commercial properties located~~2020. Increased vacancy in the ~~Fargo, North Dakota region constituted $217~~Minneapolis market accounts for $533 of decreased commercial revenue. Furthermore, the ~~decreased revenues. As of September 30, 2020, these properties are considered fully leased through an executed 12 year lease. In addition, disposition~~dispositions of two commercial properties account for ~~$141 in~~$186 of the decreased revenues during the three months ended September 30, 2020. The remaining decrease relates to the amortization of straight line rents at a commercial office building in our Minneapolis, Minnesota market as well as overall decreased estimated common area maintenance income for the three months ended September 30, 2020 as compared to the same period in 2019.2021. Commercial revenues comprised ~~19.5%~~15.8% of the total revenues for the three months ended September 30, ~~2020~~2021 compared to ~~21.6%~~19.5% of total revenues for the three months ended September 30, ~~2019.~~2020.

Expenses

Residential expenses from operations of ~~$13,506~~$15,352 during the three months ended September 30, ~~2020 decreased $64~~2021 increased $1,846 or ~~0.5%~~13.7% in comparison to the same period in ~~2019. Though the net decrease is relatively comparable to the same period in 2019, expenses as shown in the above table vary significantly by category as compared to the same period in 2019.~~2020. The ~~net decrease is~~increase was attributed to ~~decreased repairs~~increased project and ~~maintenance~~upgrades expense of ~~$444~~$599 or ~~7.7%, offset by~~76.6%. The increase is also attributed to increased real estate taxes of ~~$142~~$257 or ~~6.1%~~10.3%, and ~~property insurance~~utility expense of ~~$289~~$214 or ~~57.3%.~~12.0%, mainly attributed to properties acquired after January 2020. Properties acquired after January1, 2020, account for $98 of the property management fees increase during the three months ended September 30, 2021. Actual property management fees ~~remained unchanged and~~ continue to approximate 5% of net collected rents; however, other property management related expenses also decreased during the three months ended 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.rents.

Commercial expenses from operations of ~~$1,796~~$2,321 during the three months ended September 30, ~~2020 decreased $14~~2021 increased $525 or ~~0.8%~~29.2% in comparison to the same period in ~~2019.~~2020. The ~~net decrease in overall expenses is~~increase was attributed to ~~COVID-19, causing shelter-in-place orders in many locations where our office space is located, resulting in decreased~~increased property management expense of $337 or 166.0%. This was related to increased advertising and marketing expenses ~~of $55~~in an office building located in Minneapolis, Minnesota in efforts to lease up vacant space. Furthermore, utility expense increased $63 or ~~21.4%~~22.0% and ~~decreased utility costs of $22 or 7.1%. Furthermore,~~ repairs and maintenance expense ~~for the three months ended September 30, 2020~~ increased ~~$65~~$58 or ~~12.2%, offsetting the above decreases.~~9.7%. A primary factor for reported increased repairs and maintenance expense is due to ~~2019 direct tenant billbacks of $120, offsetting~~deferred repairs and maintenance ~~expense for~~costs that were not able to be performed during the ~~period then ended. Repairs and maintenance expense decreased $55 when focusing specifically on expenses incurred related to business operations.~~COVID-19 pandemic.

Interest expense of ~~$4,187~~$4,671 during the three months ended September 30, ~~2020 decreased $334~~2021 increased $484 or ~~7.4%~~11.6% in comparison to the same period in 2019. Payoffs of higher interest rate loans during the first quarter of 2020 and fourth quarter of 2019 as well as new debt and refinancing during 2020, decreased the overall weighted average interest rate on our outstanding mortgage debt. The lower mortgage rate decreased total interest paid on mortgages2020. Interest expense related to financing activities increased by ~~$172~~$223 during the three months ended September 30, ~~2020~~2021 as compared to the same period in ~~2019, leading to mortgage interest expense as a percent of income of 13.65% in 2020 versus 14.53% in 2019. Additionally,~~2020. The primary reason for increased interest expense on debt is due to increased mortgage balance on the portfolio as a whole. Capitalized interest expense related to 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 $165decreased $138 during the three months ended September 30, 2021 compared to the same period in 2020. During the three months ended September 30, 2021, interest expense was 14.1% of total revenues.

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Depreciation and amortization expense of ~~$5,328~~$5,551 during the three months ended September 30, ~~2020~~2021 increased $6$223 or ~~0.1%~~4.2% in comparison to the same period in ~~2019.~~2020. Properties acquired since January 1, 2020 contributed approximately $359 to the increase in depreciation expense. 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, 2021 and 2020 was 16.8% and ~~2019 was 17.26% and 17.64%~~17.3%, respectively.

REIT administration expenses of ~~$972~~$1,007 during the three months ended September 30, ~~2020~~2021 increased $3$35 or ~~0.3%~~3.6% in comparison to the same period in ~~2019, showing administrative expenses remaining consistent as compared~~2020, due to ~~the same period in 2019.~~an increase of REIT advisory fees paid.

Other income of ~~$189~~$1,567 during the three months ended September 30, ~~2020~~2021 increased ~~$700~~$1,378 or ~~136.99%~~729.1% in comparison to the same period in ~~2019. The~~2020. During the three months ended September 30, 2021 the trust received $1,000 from related parties, for reimbursement of expenses paid that were associated with capital projects is the primary ~~reason~~factor for the increase ~~was that~~in other income as compared the ~~future economic benefit of a portion of a commercial property in Fargo, North Dakota was determined to be non-recoverable. As such,~~same period for 2020. No reimbursements were received during the three months ended September 30, ~~2019, we also experienced a loss~~2020. A gain on involuntary conversion ~~of $816 due to the partial demolition of that property. There is no such loss recorded for~~was recognized during the three months ended September 30, ~~2020.~~

~~Net Operating Income~~

~~We measure~~2021 of $578 that was not recognized during 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 amortizationsame period in 2020. This was related to ~~real estate investments and impairment of real estate investments). We believe~~a roof collapse claim that ~~NOI is an important supplemental measure of operating performance for~~occurred in March 2019 at 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~~commercial property 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.Fargo, North Dakota.

~~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, as well as the impact the COVID-19 pandemic has had on the operational expenses of the portfolio.

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Results of Operations for the Nine Months Ended September 30, 2021 and 2020


	Nine months ended September 30, 2020						Nine months ended September 30, 2019						Nine months ended September 30, 2021						Nine months ended September 30, 2020
	Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total

	(unaudited)						(unaudited)						(unaudited)						(unaudited)
	(in thousands)						(in thousands)						(in thousands)						(in thousands)
Real Estate Revenues	$	73,234	$	18,359	$	91,593	$	70,920	$	19,355	$	90,275	$	80,028	$	16,708	$	96,736	$	73,234	$	18,359	$	91,593
Real Estate Expenses
Real Estate Taxes		7,433		2,030		9,463		7,001		2,083		9,084		8,025		2,098		10,123		7,433		2,030		9,463
Property Management		9,495		666		10,161		9,504		752		10,256		9,708		1,044		10,752		9,495		666		10,161
Utilities		6,098		810		6,908		6,246		897		7,143		6,648		808		7,456		6,098		810		6,908
Repairs and Maintenance		14,572		1,508		16,080		15,557		1,694		17,251		15,819		1,478		17,297		14,572		1,508		16,080
Insurance		2,380		110		2,490		1,646		59		1,705		2,364		87		2,451		2,380		110		2,490
Total Real Estate Expenses		39,978		5,124		45,102		39,954		5,485		45,439		42,564		5,515		48,079		39,978		5,124		45,102
Net Operating Income	$	33,256	$	13,235		46,491	$	30,966	$	13,870		44,836	$	37,464	$	11,193		48,657	$	33,256	$	13,235		46,491
Interest						12,761						13,819						13,261						12,761
Depreciation and amortization						15,826						16,213						16,634						15,826
Administration of REIT						3,218						3,051						3,267						3,218
Other (income)/expense						(2,204)						(328)
Other income																		(4,337)						(2,204)
Net Income					$	16,890					$	12,081					$	19,832					$	16,890

Net Income Attributed to:
Noncontrolling Interest					$	11,031					$	7,933					$	12,713					$	11,031
Sterling Real Estate Trust					$	5,859					$	4,148					$	7,119					$	5,859
Dividends per share⁽¹⁾					$	0.7941					$	0.7838					$	0.7950					$	0.7941
Earnings per share					$	0.6100					$	0.4500					$	0.7100					$	0.6100
Weighted average number of common shares						9,638						9,208						10,095						9,638

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

Revenues

Property revenues of ~~$91,593~~$96,736 for the nine months ended September 30, ~~2020~~2021 increased ~~$1,318~~$5,143 or ~~1.5%~~5.6% in comparison to the same period in ~~2019.~~2020. Residential property revenues increased ~~$2,314~~$6,794 and commercial property revenues decreased ~~$996,~~$1,651, 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,		September 30,		September 30,
	2020		2019		2021		2020
Residential occupancy	93.1	%	93.8	%	94.1	%	93.1	%
Commercial occupancy	93.6	%	91.8	%	78.2	%	93.6	%

Residential revenues for the nine months ended September 30, ~~2020~~2021 increased ~~$2,314~~$6,794 or ~~3.3%~~9.3% in comparison to the same period for ~~2019.~~2020. Residential properties acquired since January 1, 2020 contributed approximately ~~$1,282~~$4,155 to the increase in total residential revenues in the nine months ended September 30, ~~2020. The remaining increase is due to~~2021. Increased lease renewals, resulting in decreased rental incentives ~~due~~contributed to ~~increased renewals,~~the rental income increase, as well as increased rent charges at ~~our~~the stabilized ~~properties as well as the increased income related to Ratio Utility Billing System (RUBS) Income in our Minneapolis, Minnesota market.~~properties. Residential revenues comprised 82.7% of total revenues for the nine months ended September 30, 2021 compared to 80.0% of total revenues for the nine months ended September 30, ~~2020 compared to 78.6% of total revenues~~2020. The vacancy decrease coincides with an increase in residential occupancy rates 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.2021 of 1.0%.

For the nine months ended September 30, 2021, total commercial revenues decreased $1,651 or 9.0% in comparison to the same period for 2020. The decrease was primarily attributed to vacant office space in commercial properties located in Minneapolis, Minnesota of $966, which coincides with the 12.7% year-over-year decrease in commercial occupancy. The disposition of three commercial properties account for $650 of the decrease to commercial revenues during the nine months

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~~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.2021. Commercial revenues comprised ~~20.0%~~17.3% of the total revenues for the nine months ended September 30, ~~2020~~2021 compared to ~~21.4%~~20.0% of total revenues for the nine months ended September 30, ~~2019. Commercial occupancy year-over-year remained comparable at approximately 89%.~~2020.

Expenses

Residential expenses from operations of ~~$39,978~~$42,564 during the nine months ended September 30, ~~2020~~2021 increased ~~$24~~$2,586 or ~~0.1%~~6.5% in comparison to the same period in ~~2019. Though the net~~2020. The increase was attributed to increased project and upgrades expense of $1,135 or 56.3%. The increase is ~~relatively comparable~~also attributed 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~~$592 or 8.0%. Properties acquired since January 1, 2020 ~~real estate taxes, of $432 or 6.2%, contribute~~contributed $385 to the overall ~~increase. This was offset by a decrease~~increase in ~~repairs and maintenance~~real estate taxes. Further, the increase is attributed to increased utility expense of ~~$985~~$550 or ~~6.3% as well as decreased utilities expense of $148 or 2.4%. Actual property management fees remained unchanged~~9.0%, mainly in the Minneapolis, Minnesota 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.Fargo, North Dakota market.

Commercial expenses from operations of ~~$5,124~~$5,515 during the nine months ended September 30, ~~2020 decreased $361~~2021 increased $391 or ~~6.6%~~7.6% in comparison to the same period in ~~2019. The decrease~~2020. During the nine months ended September 30, 2021 property management fees increased by $378 or 56.8%. This was related to increased advertising and marketing expenses in ~~overall expenses is attributed~~an office building located in Minneapolis, Minnesota in efforts 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.lease up vacant space.

Interest expense of ~~$12,761~~$13,261 during the nine months ended September 30, ~~2020 decreased $1,058~~2021 increased $500 or 3.9% in comparison to the same period in ~~2019. Payoffs of higher~~2020. Capitalized interest ~~rate loans~~expense related to construction in progress decreased $329 during the ~~first quarter of~~nine months ended September 30, 2021, compared to the same period in 2020, ~~and fourth quarter of 2019 as well as new debt and refinancing during 2020, decreased~~thus increasing the overall ~~weighted average~~ interest ~~rate on our mortgage debt. The lower mortgage rate decreased total interest paid on mortgages of $564~~expense for the nine months ended September 30, 2021 by $329. Interest expense related to financing activities increased by $191 during the nine months ended September 30, 2021 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,~~2020. The primary reason for increasing interest expense ~~on construction in progress, also contributed~~related to debt is due to the ~~decrease in interest expense as compared to~~increase of mortgage principle of the ~~same period in 2019. Interest expense for construction in progress is classified as a contra-expense account, offsetting interest expense by $480 for~~Trust’s debt portfolio. During the nine months ended September 30, ~~2020~~2021, interest expense was 13.7% of total revenues

Depreciation and amortization expense of ~~$15,826~~$16,634 for the nine months ended September 30, ~~2020 decreased $387~~2021 increased $808 or ~~2.4%~~5.1% in comparison to the same period in ~~2019.The decrease is primarily due~~2020. Properties acquired since January 1, 2020, contributed approximately $848 to the ~~write off of certain lease intangibles at an office building located~~increase in ~~Minneapolis, Minnesota.~~depreciation expense. 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~~2021 and ~~2019~~2020 was relatively consistent at ~~17.3%~~17.2% and ~~18.0%~~17.3%, respectively.

REIT administration expenses of ~~$3,218~~$3,267 for the nine months ended September 30, ~~2020~~2021 increased ~~$167~~$49 or ~~5.5%~~1.5% in comparison to the same period in ~~2019.~~2020. The increase is ~~attributable~~attributed 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,~~2021 as compared to ~~2019.~~2020.

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Other income of ~~$2,204~~$4,337 for the nine months ended September 30, ~~2020~~2021 increased ~~$1,876~~$2,133 or ~~572%~~96.8% in comparison to the same period in ~~2019. Realized~~2020. The primary reason for the increase is due to insurance claims resulting in recognized gains ~~of $1,456~~ on ~~the sale of two commercial properties~~involuntary conversion during the nine months ended September 30, ~~2020~~2021 of $1,183, which did not occur during the same period in 2020. The insurance claims are from a wind storm claim that occurred in June 2019 and roof collapse in March 2019. During the nine months ended September 30, 2021, the Trust received $1,000 from related parties, in reimbursement for expenses paid that were associated with capital projects is ~~the primary~~another factor infor the increase in other income. The Trust realized gains of $253 on the sale of real estate investments during the nine months ended September 30, 2021 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 months ended September 30, 2020was $16,890 compared to $12,081 for the nine months ended September 30, 2019.~~2020.

COVID-19 Impact

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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~~

COVID-19 Developments

During the ~~three~~the nine months ended September 30, ~~2020,~~2021, the Trust continued to monitor state and federal legislative actions and efforts ~~in regards to~~regarding the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen a number of ~~tenants~~residents complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on ~~these tenants~~residents and, at this time is unable to predict, with complete certainty, the impact that the COVID-19 ~~and the eviction moratorium will~~ have on its future financial condition, results of operations and cash flows, however, is optimistic that the collection efforts will result in the Trust receiving a substantial amount of delinquent rents due to numerous uncertainties.

~~During~~

The situation surrounding 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 dateCOVID-19 pandemic remains fluid, and the Trust is ~~pursuing legal remedies~~actively managing its response in collaboration with residents, commercial tenants, and business partners and assessing potential impacts to financial position and operating results, as well as potential adverse impacts on our business. With legislation related to ~~these amounts which are not material~~COVID-19 ever evolving, management remains steadfast in ~~the aggregate. The Trust will continue~~working with residents to ~~evaluate any further tenant~~apply for rent relief ~~requests on an individual basis, considering a number~~programs to help pay unpaid rents, and be distributed to the properties. As of ~~factors. Not all tenant requests~~September 30, 2021, the Trust’s Property Management Company’s efforts to work with residents and apply for these funds, since the second quarter of 2020, has provided approximately $2,800 in rent help for our residential portfolio. Management continues to apply for rent help in excess of $1,000 in relation to the Minnesota residential portfolio and is optimistic that these funds will ~~ultimately result in modification agreements, nor will~~be received. Our management remains committed to ensuring the safety of team members, residents, and communities, and to maintaining the financial stability of the Trust ~~forgo its contractual rights under its lease agreements.~~for the duration of the COVID-19 pandemic.

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~~Property Acquisitions and Dispositions~~

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

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

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

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

Construction in Progress and Development Projects

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

Construction in progress as of September 30, ~~2020~~2021 consists primarily of ~~development and planning costs associated with the Goldmark Office Park building~~construction at several residential properties located in ~~Fargo,~~ North Dakota, ~~the Montreal Courts Apartment located in Little Canada, Minnesota~~ and ~~the Bayview Apartments~~Missouri, and Trustmark Office Park located in Fargo, North Dakota. The ~~Goldmark Office Park~~Prairiewood Meadows construction consists of ~~three commercial office buildings.~~the re-development of one building due to a fire, a new clubhouse for residents, and parking lot repairs. Current expectations are that the ~~project which includes building renovations, reconstruction of portions of the office park and additional amenities~~projects will be completed in ~~phases with~~ the ~~primary phase completed in 2020. The~~fourth quarter of 2021 and first quarter of 2022, and the current ~~project~~ budget ~~is approximately $6,790~~approximates $3,590, of which ~~$6,718~~$1,485 has been incurred and is included in construction in progress. The ~~Montreal Courts~~Quail Creek Apartments ~~development consists~~projects primarily consist of work related to roof repairs and re-development of one building due to a ~~new clubhouse.~~fire. Current expectations are that the project will be completed in the fourth quarter of ~~2020~~2021 and the current ~~project~~ budget approximates ~~$3,752~~$894, of which ~~$1,405~~$727 has been incurred and is included in construction in progress. The ~~Bayview Apartments development~~Trustmark construction primarily consists of ~~new windows~~office demolition and ~~siding.~~clearing, as well as tenant space remodel and build-outs. Current expectations are that the ~~project~~projects will be completed in the fourth quarter of ~~calendar year 2020~~2021 and the current project ~~budget approximates $1,893~~budgets approximate $5,870 of which ~~$1,152~~$5,675 has been incurred and is included in construction in progress. Remaining construction in progress projects are primarily related to exterior window and lighting upgrades and new deck systems on multiple residential properties.

AsTable 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.~~Contents

~~The Trust is involved with two joint ventures as of September 30, 2020.~~

Funds From Operations (FFO)

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

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.

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

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

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

~~(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.~~


	Three months ended September 30, 2021			Three months ended September 30, 2020
			Weighted Avg			Weighted Avg
			Shares and			Shares and
	Amount		Units(1)	Amount		Units(1)

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	2,104	10,215	$	1,844	9,740

Add back:
Noncontrolling Interest - OPU		3,753	18,256		3,450	18,232
Depreciation & Amortization from continuing operations		5,551			5,328
Pro rata share of unconsolidated affiliate depreciation & amortization		207			95
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)	$	11,615	28,471	$	10,717	27,972

~~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.~~


	Nine months ended September 30, 2021				Nine months ended September 30, 2020
			Weighted Avg			Weighted Avg
			Shares and			Shares and
	Amount		Units(1)	Amount		Units(1)

	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	7,119	10,095	$	5,859	9,638

Add back:
Noncontrolling Interest - OPU		12,861	18,236		11,046	18,170
Depreciation & Amortization from continuing operations		16,634			15,826
Pro rata share of unconsolidated affiliate depreciation & amortization		499			283
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(1,710)			(1,456)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	35,403	28,331	$	31,558	27,808

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, development projects, 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~~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.~~expirations and the effects of the COVID-19 pandemic on its impact on rental income proceeds.

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~~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 the next twelve months.~~less. 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.~~property.

COVID-19

The Trust does not anticipate COVID-19 will result in a material reduction of our liquidity sources. The Trust anticipates our monthly collection of rent, the economic occupancy rates of our portfolio and rental rates to continue to stabilize to pre-pandemic levels. However, as the pandemic continues to evolve and produce many unknown circumstances, there is potential for rent collections and occupancy rates to vary from anticipated factors, resulting in reduced liquidity sources.

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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
Net cash flows provided by operating activities	$	35,988	$	34,015	$	32,840	$	35,988
Net cash flows used in investing activities	$	(28,173)	$	(9,883)	$	(49,112)	$	(31,398)
Net cash flows used in financing activities	$	(10,247)	$	(32,097)
Net cash flows provided by (used in) financing activities					$	21,684	$	(7,022)

Table of Contents

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,~~costs, 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~~$32,840 and ~~$34,015~~$35,988 for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization.

Investing Activities

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

Net cash used in investing activities was ~~$28,173~~$49,112 and ~~$9,883~~$31,398 for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, cash flows used in investing activities related specifically to the acquisition of properties and capital expenditures was ~~$33,059~~$49,522 and ~~$8,935,~~$36,284, respectively. ~~During the nine months ended September 30, 2020, a note receivable~~Proceeds 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,~~$4,095 and $1,077 were received from involuntary conversions during the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020. In addition, proceeds of ~~$1,077~~$5,590 and ~~$1,513~~$5,483 were ~~received~~generated from ~~involuntary conversions, respectively. During~~the sales of real estate investments during the nine months ended September 30, 2021 and 2020. For the nine months ended September 30, 2021 and 2020, ~~proceeds of $5,483 were generated from the sale of two commercial properties.~~cash flows used for investment in unconsolidated affiliates was $5,845 and $1,170 respectively.

Financing Activities

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

~~Table~~Net cash provided by financing activities was $21,684 for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we paid $17,309 in dividends and distributions, redeemed $4,465 of ~~Contents~~

shares and units, received $71,530 from new mortgage notes payable, and made mortgage principal payments of $30,360. Net cash used in financing activities was ~~$10,247 and $32,097~~$7,022 for the nine months ended September 30, ~~2020 and 2019, respectively. During~~2020. For the nine months ended September 30, 2020, we paid $17,012 in dividends and distributions, redeemed $2,786 of shares and units, received ~~$22,910~~$26,135 from new mortgage notes payable, and made mortgage principal payments of $15,249. ~~For the nine months ended September 30, 2019, we paid $16,333 in dividends and distributions, redeemed $1,573 of shares and units, and made mortgage principal payments of $16,330.~~

Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 2021 to September 30, 2021 totaling $8,020 or $0.7950 per share, of which $2,818 were cash dividends and $5,202 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $32,840 from our cash flows from operations.

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

We declared cash dividends to our shareholders during the period from January 1, 2019 to September 30, 2019 totaling $7,216 or $0.7838 per share, of which $2,548 was cash dividends and $4,668 were reinvested through the dividend reinvestment plan. The cash dividends were paid with the $34,015 from our cash flows from operations.

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

Table of Contents

The following table presents certain information regarding our dividend coverage:


	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	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 $19,832 and $16,890, respectively)					$	32,840	$	35,988
Distributions in excess of earnings received from unconsolidated affiliates		239		(32)		—		239
Gain (Loss) on sales of real estate and non-real estate investments		1,456		—		1,710		1,456
Dividends declared		(7,648)		(7,216)		(8,020)		(7,648)
Excess	$	30,035	$	26,767	$	26,530	$	30,035

Limited Partnership Units

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

For the nine months ended September 30, 2021, we declared distributions totaling $14,493 to holders of limited partnership units in our Operating Partnership, which we paid on April 15, July 15 and October 15, 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 nine months ended September 30, 2020, we declared quarterly distributions totaling $14,484 to holders of limited partnership units in our ~~operating partnership,~~Operating Partnership, which we paid on April 15, July 15 and October 15, 2020. Distributions were paid at a rate of $0.2647 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

Sources of Dividends and Distributions

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~~2021, we paid ~~on April 15, July 15, and October 15, 2019. Distributions~~aggregate dividends $7,922, which were paid ~~at a rate of $0.2613 per unit per quarter, which~~with cash flows provided by operating activities. Our funds from operations, FFO, was $35,403 Therefore, our management believes our distribution policy is ~~equal to the per share distribution rate paid to the common shareholders.~~

~~Table of Contents~~

~~Sources of Dividends~~

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

Cash Resources

At September 30, ~~2020,~~2021, our unrestricted cash resources consisted of cash and cash equivalents totaling approximately ~~$6,499.~~$22,168. 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,~~$66,641, which could potentially be used as collateral to secure additional financing in future periods.

At September 30, ~~2020,~~2021, there was no balance outstanding on our lines of credit. The lines of credit aggregate ~~$31,415~~$9,915 in total availability and are collateral for two letters of credit totaling ~~$1,216,~~$67, leaving ~~$30,199~~$9,982 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~~Operating Partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us.

During the nine months ended September 30, 2021, we did not sell any common shares in a private placement. During the nine months ended September 30, 2021, we issued 269,000 and 150,000 common shares for $8,121 under the dividend reinvestment plan, through dividends reinvested and the optional share purchases. During the nine months ended September 30, 2020, we did not sell any common shares in a private placement. During the nine months ended September 30, 2020, we issued 265,000 and 134,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively, and raised gross proceeds of $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 sharesfor $7,415, under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, ~~respectively, and raised gross proceeds~~respectively.

Table of ~~$7,002.~~Contents

During the nine months ended September 30, ~~2020,~~2021, we issued ~~469,000~~2,883,000 limited partnership units in connection with ~~six~~three of the ~~eight~~five properties acquired.

~~Off-Balance Sheet Arrangements~~

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

~~Inflation~~Unconsolidated Affiliate Arrangements

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

As of September 30, 2021 and December 31, 2020, ~~most~~we had debt obligations related to investments in unconsolidated affiliates of ~~our commercial leases require tenants to pay directly or reimburse us~~$81,078 and $41,405, respectively. The Trust is jointly and severally liable 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.

~~Table of Contents~~

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.~~credit.

The carrying amount of our interest rate swaps have been adjusted to their fair value at September 30, 2021, resulting in a liability of $856 and asset of $524. 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.~~ 31, 2021.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, ~~2020,~~2021, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the ~~second~~third 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~~Operating Partnership issued any unregistered securities during the three months ended September 30, ~~2020.~~2021.

Other Sales

During the three months ended September 30, ~~2020,~~2021, we did not issue any common shares in exchange for limited partnership units of the ~~operating partnership~~Operating Partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Section 4 (a) (2) and Rule 506 of Regulation D.

Redemptions of Securities

Set forth below is information regarding common shares and limited partnership units redeemed during the ~~nine~~the three months ended September 30, ~~2020:~~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

April 1-30, 2021	8,000	49,000	$	19.00	1,411,000	981,000	$	4,840
May 1-31, 2021	5,000	10,000	$	19.00	1,416,000	991,000	$	4,544
June 1-30, 2021	2,000	38,000	$	19.00	1,418,000	1,029,000	$	3,775
Total	15,000	97,000

July 1-31, 2021	5,000	26,000	$	19.00	1,423,000	1,055,000	$	3,179
August 1-31, 2021	1,000	16,000	$	19.00	1,424,000	1,071,000	$	2,876
September 1-30, 2021	—	1,000	$	19.00	1,424,000	1,072,000	$	17,860
Total	6,000	43,000

For the ~~nine~~three months ended September 30, ~~2020,~~2021, we redeemed all shares or units for which we received redemption requests. In addition, for the ~~nine~~the three months ended September 30, ~~2020,~~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,~~Operating Partnership, up to a maximum amount of ~~$40,000~~$55,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of September 30, ~~2020,~~2021, was ~~$8,076.~~$17,860. 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
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.

101		The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2020~~2021 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, ~~2020~~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~~2021 and ~~2019;~~2020; (iii) Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, 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~~10, 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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