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 March 31, 20212022
Or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from ------------to------------
Commission File Number: 000-54295
Sterling Real Estate Trust
d/b/a Sterling Multifamily Trust
(Exact name of registrant as specified in its charter)
North Dakota | 90-0115411 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
| 58103 |
(Address of principal executive offices) | (Zip Code) |
(701) 353-2720
(Registrant’s telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last report)
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large acceleratedlarge-accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated“large-accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
| | ||
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
(Do not check if a smaller reporting company) | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at May |
Common Shares of Beneficial Interest, | |
|
STERLING REAL ESTATE TRUST
INDEX
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of March 31, 20212022 (UNAUDITED) and December 31, 20202021
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | | | | | |
Land and land improvements | | $ | 126,432 | | $ | 125,338 |
Building and improvements | | | 778,050 | | | 763,003 |
Construction in progress | | | 6,995 | | | 8,361 |
Real estate investments | | | 911,477 | | | 896,702 |
Less accumulated depreciation | | | (184,198) | | | (179,155) |
Real estate investments, net | | | 727,279 | | | 717,547 |
Cash and cash equivalents | | | 49,854 | | | 51,507 |
Restricted deposits | | | 11,639 | | | 9,149 |
Investment in unconsolidated affiliates | | | 23,852 | | | 18,658 |
Notes receivable | | | 6,893 | | | 7,457 |
Lease intangible assets, less accumulated amortization | | | 6,011 | | | 6,246 |
Other assets, net | | | 14,734 | | | 10,302 |
| | | | | | |
Total Assets | | $ | 840,262 | | $ | 820,866 |
| | | | | | |
LIABILITIES | | | | | | |
Mortgage notes payable, net | | $ | 502,140 | | $ | 493,142 |
Dividends payable | | | 8,366 | | | 7,567 |
Tenant security deposits payable | | | 5,587 | | | 5,225 |
Lease intangible liabilities, less accumulated amortization | | | 766 | | | 811 |
Accrued expenses and other liabilities | | | 13,866 | | | 18,604 |
Total Liabilities | | | 530,725 | | | 525,349 |
| | | | | | |
COMMITMENTS and CONTINGENCIES - Note 13 | | | | | | |
| | | | | | |
SHAREHOLDERS' EQUITY | | | | | | |
Beneficial interest | | | 117,691 | | | 116,856 |
Noncontrolling interest | | | | | | |
Operating partnership | | | 183,585 | | | 176,954 |
Partially owned properties | | | 2,687 | | | 2,657 |
Accumulated other comprehensive income (loss) | | | 5,574 | | | (950) |
Total Shareholders' Equity | | | 309,537 | | | 295,517 |
| | | | | | |
| | $ | 840,262 | | $ | 820,866 |
See Notes to Consolidated Financial Statements
3
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED March 31, 2022 and 2021 (UNAUDITED)
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | | | | | |
Land and land improvements | | $ | 119,114 | | $ | 119,088 |
Building and improvements | | | 719,637 | | | 712,560 |
Construction in progress | | | 9,339 | | | 13,640 |
Real estate investments | | | 848,090 | | | 845,288 |
Less accumulated depreciation | | | (165,200) | | | (160,575) |
Real estate investments, net | | | 682,890 | | | 684,713 |
Cash and cash equivalents | | | 13,888 | | | 11,716 |
Restricted deposits and funded reserves | | | 16,459 | | | 15,919 |
Investment in unconsolidated affiliates | | | 11,664 | | | 9,659 |
Notes receivable | | | 2,009 | | | 2,026 |
Assets held for sale | | | 830 | | | 831 |
Lease intangible assets, less accumulated amortization of $14,507 in 2021 and $15,019 in 2020 | | | 7,075 | | | 7,367 |
Other assets, net | | | 10,449 | | | 10,798 |
| | | | | | |
Total Assets | | $ | 745,264 | | $ | 743,029 |
| | | | | | |
LIABILITIES | | | | | | |
Mortgage notes payable, net | | $ | 425,164 | | $ | 421,278 |
Dividends payable | | | 7,477 | | | 7,447 |
Tenant security deposits payable | | | 5,084 | | | 4,908 |
Lease intangible liabilities, less accumulated amortization of $1,934 in 2021 and $1,963 in 2020 | | | 947 | | | 994 |
Liabilities related to assets held for sale | | | 17 | | | 5 |
Accrued expenses and other liabilities | | | 12,716 | | | 16,869 |
Total Liabilities | | | 451,405 | | | 451,501 |
| | | | | | |
COMMITMENTS and CONTINGENCIES - Note 16 | | | | | | |
| | | | | | |
SHAREHOLDERS' EQUITY | | | | | | |
Beneficial interest | | | 110,992 | | | 109,366 |
Noncontrolling interest | | | | | | |
Operating partnership | | | 179,911 | | | 181,621 |
Partially owned properties | | | 2,377 | | | 2,346 |
Accumulated other comprehensive (loss) income | | | 579 | | | (1,805) |
Total Shareholders' Equity | | | 293,859 | | | 291,528 |
| | | | | | |
| | $ | 745,264 | | $ | 743,029 |
See Notes to Consolidated Financial Statements
3
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED March 31, 2021 and 2020 (UNAUDITED)
| | | | | | | | | | |
| Three Months Ended | Three Months Ended | ||||||||
| March 31, | March 31, | ||||||||
| 2021 |
| 2020 | 2022 |
| 2021 | ||||
| (in thousands, except per share data) | (in thousands, except per share data) | ||||||||
Income from rental operations | | | ||||||||
Real estate rental income | $ | 31,760 | | $ | 29,906 | $ | 32,916 | | $ | 31,760 |
Expenses | | | | | | | | | | |
Expenses from rental operations | | | | | | | | | | |
Operating expenses, excluding real estate taxes | | 12,107 | | | 12,535 | |||||
Operating expenses | | 14,689 | | | 12,107 | |||||
Real estate taxes | | 3,244 | | | 3,164 | | 3,497 | | | 3,244 |
Depreciation and amortization | | 5,328 | | | 5,252 | | 5,782 | | | 5,328 |
Interest | | 4,287 | | | 4,350 | | 4,845 | | | 4,287 |
| | 24,966 | | | 25,301 | | 28,813 | | | 24,966 |
Administration of REIT | | 1,201 | | | 1,162 | | 1,217 | | | 1,201 |
Total expenses | | 26,167 | | | 26,463 | | 30,030 | | | 26,167 |
Income from operations | | 5,593 | | | 3,443 | | 2,886 | | | 5,593 |
| | | | | | | | | | |
Other income | | | | | | | | | | |
Equity in income of unconsolidated affiliates | | (27) | | | 158 | |||||
Equity in losses of unconsolidated affiliates | | (1,141) | | | (27) | |||||
Other income | | 270 | | | 119 | | 315 | | | 270 |
Gain on sale of real estate and non-real estate investments | | — | | | 1,455 | |||||
Gain on involuntary conversion | | — | | | 52 | |||||
| | 243 | | | 1,784 | |||||
Gain on sale or conversion of real estate investments | | 1,329 | | | — | |||||
Total other income | | 503 | | | 243 | |||||
Net income | $ | 5,836 | | $ | 5,227 | $ | 3,389 | | $ | 5,836 |
Net income (loss) attributable to noncontrolling interest: | | | | | | |||||
Net income attributable to noncontrolling interest: | | | | | | |||||
Operating Partnership | | 3,753 | | | 3,419 | | 2,145 | | | 3,753 |
Partially owned properties | | 31 | | | (5) | | 30 | | | 31 |
Net income attributable to Sterling Real Estate Trust | $ | 2,052 | | $ | 1,813 | $ | 1,214 | | $ | 2,052 |
| | | | | | | | | | |
Net income attributable to Sterling Real Estate Trust per common share, basic and diluted | $ | 0.21 | | $ | 0.19 | $ | 0.12 | | $ | 0.21 |
| | | | | | | | | | |
Comprehensive income: | | | | | | | | | | |
Net income | $ | 5,836 | | $ | 5,227 | $ | 3,389 | | $ | 5,836 |
Other comprehensive gain (loss) - change in fair value of interest rate swaps | | 2,384 | | | (1,486) | |||||
Other comprehensive gain - change in fair value of interest rate swaps | | 6,524 | | | 2,384 | |||||
Comprehensive income | | 8,220 | | | 3,741 | | 9,913 | | | 8,220 |
Comprehensive income attributable to noncontrolling interest | | 5,325 | | | 2,442 | | 6,342 | | | 5,324 |
Comprehensive income attributable to Sterling Real Estate Trust | $ | 2,895 | | $ | 1,299 | $ | 3,571 | | $ | 2,896 |
| | | | | | | | | | |
Weighted average Common Shares outstanding, basic and diluted | | 9,983 | | | 9,562 | | 10,465 | | | 9,983 |
See Notes to Consolidated Financial Statements
4
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED March 31, 20212022 and 20202021 (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Accumulated | | | | | Noncontrolling | | | | | | | |||||
| | | | | | | Distributions | | Total | | Interest | | Accumulated | | | | |||||||
| | Common | | Paid-in | | in Excess of | | Beneficial | | Operating | | Partially Owned | | Comprehensive | | | |||||||
| | Shares | | Capital | | Earnings | | Interest | | Partnership | | Properties | | Income (Loss) | | Total | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | |||||||||||||||||||||
BALANCE AT DECEMBER 31, 2019 | | 9,436 | | $ 131,261 | | ($ 28,888) | | $ 102,373 | | $ 174,221 | | $ 2,416 | | $ 37 | | $ 279,047 | |||||||
Contribution of assets in exchange for the issuance of noncontrolling interest shares | | - | | - | | - | | - | | 9,031 | | - | | - | | 9,031 | |||||||
Shares/units redeemed | | (38) | | (696) | | - | | (696) | | (541) | | - | | - | | (1,237) | |||||||
Dividends and distributions declared | | - | | - | | (2,527) | | (2,527) | | (4,831) | | - | | - | | (7,358) | |||||||
Dividends reinvested - stock dividend | | 87 | | 1,584 | | - | | 1,584 | | - | | - | | - | | 1,584 | |||||||
Issuance of shares under optional purchase plan | | 62 | | 1,203 | | - | | 1,203 | | - | | - | | - | | 1,203 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | (1,486) | | (1,486) | |||||||
Net income | | - | | - | | 1,813 | | 1,813 | | 3,419 | | (5) | | - | | 5,227 | |||||||
BALANCE AT MARCH 31, 2020 | | 9,547 | | $ 133,352 | | ($ 29,602) | | $ 103,750 | | $ 181,299 | | $ 2,411 | | ($ 1,449) | | $ 286,011 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Accumulated | | | | | Noncontrolling | | | | | | | |||||
| | | | | | | Distributions | | Total | | Interest | | Accumulated | | | | |||||||
| | Common | | Paid-in | | in Excess of | | Beneficial | | Operating | | Partially Owned | | Comprehensive | | | |||||||
| | Shares | | Capital | | Earnings | | Interest | | Partnership | | Properties | | Income (Loss) | | Total | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | |||||||||||||||||||||
BALANCE AT DECEMBER 31, 2020 | | 9,855 | | $ 139,105 | | (29,739) | | $ 109,366 | | $ 181,621 | | $ 2,346 | | ($ 1,805) | | $ 291,528 | |||||||
Shares/units redeemed | | (41) | | (777) | | - | | (777) | | (628) | | - | | - | | (1,405) | |||||||
Dividends and distributions declared | | - | | - | | (2,642) | | (2,642) | | (4,835) | | - | | - | | (7,477) | |||||||
Dividends reinvested - stock dividend | | 89 | | 1,686 | | - | | 1,686 | | - | | - | | - | | 1,686 | |||||||
Issuance of shares under optional purchase plan | | 65 | | 1,307 | | - | | 1,307 | | - | | - | | - | | 1,307 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | 2,384 | | 2,384 | |||||||
Net income | | - | | - | | 2,052 | | 2,052 | | 3,753 | | 31 | | - | | 5,836 | |||||||
BALANCE AT MARCH 31, 2021 | | 9,968 | | $ 141,321 | | ($ 30,329) | | $ 110,992 | | $ 179,911 | | $ 2,377 | | $ 579 | | $ 293,859 |
See Notes to Consolidated Financial Statements
5
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 2021 and 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, 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 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2021 | | 10,342 | | $ 148,562 | | ($ 31,706) | | $ 116,856 | | $ 176,954 | | $ 2,657 | | ($ 950) | | $ 295,517 | |||||||
Contribution of assets in exchange for the issuance of noncontrolling interest shares | | - | | - | | - | | - | | 10,180 | | - | | - | | 10,180 | |||||||
Shares/units redeemed | | (18) | | (401) | | - | | (401) | | (335) | | - | | - | | (736) | |||||||
Dividends and distributions declared | | - | | - | | (3,007) | | (3,007) | | (5,359) | | - | | - | | (8,366) | |||||||
Dividends reinvested - stock dividend | | 79 | | 1,716 | | - | | 1,716 | | - | | - | | - | | 1,716 | |||||||
Issuance of shares under optional purchase plan | | 57 | | 1,313 | | - | | 1,313 | | - | | - | | - | | 1,313 | |||||||
Change in fair value of interest rate swaps | | - | | - | | - | | - | | - | | - | | 6,524 | | 6,524 | |||||||
Net income | | - | | - | | 1,214 | | 1,214 | | 2,145 | | 30 | | - | | 3,389 | |||||||
BALANCE AT MARCH 31, 2022 | | 10,460 | | $ 151,190 | | ($ 33,499) | | $ 117,691 | | $ 183,585 | | $ 2,687 | | $ 5,574 | | $ 309,537 |
See Notes to Consolidated Financial Statements
5
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 5,836 | | $ | 5,227 |
Adjustments to reconcile net income to net cash from operating activities | | | | | | |
Gain on sale of real estate investments | | | — | | | (1,455) |
Gain on involuntary conversion | | | — | | | (52) |
Equity in loss (income) of unconsolidated affiliates | | | 27 | | | (158) |
Distributions of earnings of unconsolidated affiliates | | | 57 | | | 158 |
Allowance for uncollectible accounts receivable | | | (47) | | | 113 |
Depreciation | | | 5,006 | | | 4,868 |
Amortization | | | 315 | | | 380 |
Amortization of debt issuance costs | | | 130 | | | 140 |
Effects on operating cash flows due to changes in | | | | | | |
Other assets | | | 229 | | | 1,449 |
Tenant security deposits payable | | | 176 | | | 131 |
Accrued expenses and other liabilities | | | (2,820) | | | (3,617) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 8,909 | | | 7,184 |
INVESTING ACTIVITIES | | | | | | |
Purchase of real estate investment properties | | | — | | | (375) |
Capital expenditures and tenant improvements | | | (3,686) | | | (5,058) |
Proceeds from sale of real estate investments and non-real estate investments | | | — | | | 3,494 |
Proceeds from involuntary conversion | | | 1,642 | | | 259 |
Investment in unconsolidated affiliates | | | (2,090) | | | (38) |
Distributions in excess of earnings received from unconsolidated affiliates | | | 1 | | | 105 |
Notes receivable payments received | | | 17 | | | — |
NET CASH USED IN INVESTING ACTIVITIES | | | (4,116) | | | (1,613) |
FINANCING ACTIVITIES | | | | | | |
Payments for financing, debt issuance | | | (154) | | | (98) |
Payments on investment certificates and subordinated debt | | | (25) | | | — |
Principal payments on special assessments payable | | | — | | | (253) |
Proceeds from issuance of mortgage notes payable and subordinated debt | | | 18,485 | | | 7,788 |
Principal payments on mortgage notes payable | | | (14,528) | | | (9,129) |
Proceeds from issuance of shares under optional purchase plan | | | 1,307 | | | 1,203 |
Shares/units redeemed | | | (1,405) | | | (1,237) |
Dividends/distributions paid | | | (5,761) | | | (5,534) |
NET CASH USED IN FINANCING ACTIVITIES | | | (2,081) | | | (7,260) |
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS | | | 2,712 | | | (1,689) |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF YEAR | | | 27,635 | | | 17,382 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF QUARTER | | $ | 30,347 | | $ | 15,693 |
| | | | | | |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF QUARTER | | | | | | |
Cash and cash equivalents | | $ | 13,888 | | $ | 4,295 |
Restricted deposits | | | 16,459 | | | 11,398 |
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF QUARTER | | $ | 30,347 | | $ | 15,693 |
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 2022 and 2021 (UNAUDITED)
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 3,389 | | $ | 5,836 |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
Gain on sale of real estate investments | | | (1,329) | | | — |
Equity in loss of unconsolidated affiliates | | | 1,141 | | | 27 |
Distributions of earnings of unconsolidated affiliates | | | 4 | | | 57 |
Allowance for uncollectible accounts receivable | | | (544) | | | (47) |
Depreciation | | | 5,390 | | | 5,006 |
Amortization | | | 392 | | | 315 |
Amortization of debt issuance costs | | | 157 | | | 130 |
Effects on operating cash flows due to changes in | | | | | | |
Other assets | | | 1,583 | | | 229 |
Tenant security deposits payable | | | 362 | | | 176 |
Accrued expenses and other liabilities | | | (3,088) | | | (2,820) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 7,457 | | | 8,909 |
INVESTING ACTIVITIES | | | | | | |
Purchase of real estate investment properties | | | (4,893) | | | — |
Capital expenditures and tenant improvements | | | (2,402) | | | (3,686) |
Proceeds from sale of real estate investments and non-real estate investments | | | 2,622 | | | — |
Proceeds from involuntary conversion | | | 261 | | | 1,642 |
Investment in unconsolidated affiliates | | | (6,444) | | | (2,090) |
Distributions in excess of earnings received from unconsolidated affiliates | | | 105 | | | 1 |
Notes receivable issued net of payments received | | | 564 | | | 17 |
NET CASH USED IN INVESTING ACTIVITIES | | | (10,187) | | | (4,116) |
FINANCING ACTIVITIES | | | | | | |
Payments for financing, debt issuance | | | (95) | | | (154) |
Payments on investment certificates and subordinated debt | | | — | | | (25) |
Proceeds from issuance of mortgage notes payable and subordinated debt | | | 12,867 | | | 18,485 |
Principal payments on mortgage notes payable | | | (3,931) | | | (14,528) |
Proceeds from issuance of shares under optional purchase plan | | | 1,313 | | | 1,307 |
Shares/units redeemed | | | (736) | | | (1,405) |
Dividends/distributions paid | | | (5,851) | | | (5,761) |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 3,567 | | | (2,081) |
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS | | | 837 | | | 2,712 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD | | | 60,656 | | | 27,635 |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD | | $ | 61,493 | | $ | 30,347 |
| | | | | | |
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD | | | | | | |
Cash and cash equivalents | | $ | 49,854 | | $ | 13,888 |
Restricted deposits | | | 11,639 | | | 16,459 |
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD | | $ | 61,493 | | $ | 30,347 |
See Notes to Consolidated Financial Statements
6
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 20212022 and 20202021 (UNAUDITED) (Continued)
| | | | | | | | | | | | |
| | Three Months Ended | | Year Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (in thousands) | | (in thousands) | ||||||||
SCHEDULE OF CASH FLOW INFORMATION | | | | | | | | | | | ||
Cash paid during the period for interest, net of capitalized interest | | $ | 4,144 | | $ | 4,203 | | $ | 4,698 | | $ | 4,144 |
| | | | | | | | | | | | |
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | | | |
Dividends reinvested | | $ | 1,686 | | $ | 1,584 | | $ | 1,716 | | $ | 1,686 |
Dividends declared and not paid | | | 2,642 | | | 2,527 | | | 3,007 | | | 2,642 |
UPREIT distributions declared and not paid | | | 4,835 | | | 4,831 | | | 5,359 | | | 4,835 |
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT | | | — | | | 9,031 | | | 10,180 | | | — |
Increase in land improvements due to increase in special assessments payable | | | 26 | | | 65 | | | — | | | 26 |
Unrealized gain (loss) on interest rate swaps | | | 2,384 | | | (1,486) | ||||||
Acquisition of assets with new financing | | | — | | | 3,225 | ||||||
Unrealized gain on interest rate swaps | | | 6,524 | | | 2,384 | ||||||
Acquisition of assets through assumption of debt and liabilities | | | — | | | 265 | | | (15,073) | | | — |
Capitalized interest and real estate taxes related to construction in progress | | | 95 | | | 137 | | | 23 | | | 95 |
See Notes to Consolidated Financial Statements
7
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Note 1 - Organization
Sterling Real Estate Trust, d/b/a Sterling Multifamily Trust (“Sterling”, “the Trust”Sterling,” the “Trust” or “the Company”the “Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code.
Sterling previously established an operating partnership (“Sterling(Sterling Properties, LLLP or the Operating“Operating Partnership”) and transferred all of its assets and liabilities to the operating partnershipOperating Partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership.Operating Partnership. As of March 31, 20212022 and December 31, 2020,2021, Sterling owned approximately 35.35%35.94% and 35.03%36.27%, 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, 2020,2021, 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. 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 monthsyear ended March 31, 2021.2022. These adjustments are of a normal recurring nature.
Principles of Consolidation
The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly-ownedwholly owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.
As of March 31, 20212022, the Trust owned approximately 35.35%35.94% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the partnership agreement, these persons have the right to tender their OP Units for redemption to the Operating Partnership at any time following a specified restricted period for cash equal to the fair value of an equivalent number of common shares of the Trust. In lieu of delivering cash, however, the Trust, as the Operating Partnership’s general partner, may, at its option, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Trust so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Trust’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Trust issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Trust an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”
8
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE. The Trust will consolidate the operations of a joint venture if the Trust determines that it is either the primary beneficiary of a variable interest entity (VIE) orand has substantial influence and control of the entity.
In instances where the Trust determines that it is not the primary beneficiary of a VIE orand the Trust does not control the joint venture but can exercise influence over the entity with respect to its operations and major decisions, the Trust will use the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Trust’s operations but instead its share of operations will be reflected as equity in earnings (loss)(losses) of unconsolidated entityaffiliates on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated entityaffiliates on the consolidated balance sheets. See Note 5 for additional details regarding variable interest entities where the Trust uses the equity method of investing.
The Operating Partnership meets the criteria as a variable interest entity (“VIE”). The Trust’s sole significant asset is its investment in the Operating Partnership. As a result, substantially all of the Trust’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Trust’s debt is an obligation of the Operating Partnership, and the Trust guarantees the unsecured debt obligations of the Operating Partnership.
Concentration of Credit Risk
Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Investments
Real estate investments are recorded at cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred.
The Trust allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the relative fair value at acquisition date of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease intangibles, (iv) acquired above and below market lease intangibles, and (v) assumed financing that is determined to be above or below market, if any. Transaction costs related to acquisitions are accounted for as asset acquisitions and capitalized as a cost of the property.
9
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
For tangible assets acquired, including land, building and other improvements, the Trust considers available comparable market and industry information in estimating acquisition date fair value. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant
9
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.
Furniture and fixtures are stated at cost less accumulated depreciation. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are expensed as incurred.
Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:
| | |
Buildings and improvements |
| 40 years |
Furniture, fixtures and equipment |
| 5-9 years |
The Trust’s investment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Trust separately determines whether impairment indicators exist for each property.
Based on evaluation, there were 0 impairment losses during the three months ended March 31, 20212022 and 2020.
Properties Held for Sale
We account for our properties held for sale in accordance with 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.
The Trust had 1 property held for sale as of March 31, 2021 and December 31, 2020. See Note 18.
Construction in Progress
The Trust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes and interest and financing costs cease and all project-related costs included in construction in process are reclassified to land and building and other improvements.
Investment in Unconsolidated Affiliates
We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. NaN impairment losses were recorded to unconsolidated affiliates for the three months ended March 31, 2021 and 2020.
10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operations and financial policies of the investee. 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 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. See Note 5, Investment in Unconsolidated Affilliates, for further information.
Noncontrolling Interest
A noncontrolling interest in a subsidiary (minority interest) is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the consolidated statements of operations and comprehensive income.
Operating Partnership: Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnership’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.
Partially Owned Properties: The Trust reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Trust that are not wholly owned by the Trust. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interests in partially owned properties in the consolidated statement of operations and comprehensive income.2021.
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. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are generally taxed on REIT distributions of ordinary income in 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.
11
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of March 31, 20212022 and December 31, 2020,2021, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2017.2018.
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 March 31, 2021,2022, all leases analyzed under the Trust’s lease classification process were determined to be operating leases.
We recognize variable income from pass-through expenses on an accrual basis over the periods10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in which the expenses were incurred. Pass-through expenses are comprised of real estate taxes, operating expensesthousands, except share and common area maintenance costs which are reimbursed by tenants in accordance with specific allowable costs per tenant lease agreements. When we pay pass-through expenses, subject to reimbursement by the tenant, they are included within operating expenses, excluding real estate taxes, and reimbursements are included within real estate rental income along with the associated base rent in the accompanying consolidated financial statements.share data)
We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $105 for the three months ended March 31, 2021 and decreased revenue by $65 for the three months ended March 31, 2020. The straight-line receivable balance included in other assets on the consolidated balance sheets as of March 31, 2021 and December 31, 2020 was $3,117 and $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 are immaterial, are recognized in the subsequent year.
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 ofduring the three months ended March 31, 2021 and 2020,2022 and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.
For the three months ended March 31, 20212022 and 2020,2021, Sterling’s denominators for the basic and diluted earnings per common share were approximately 10,465,000 and 9,983,000, and 9,562,000, respectively.
Reclassifications
Certain reclassifications considered necessary for a fair presentation have been made to the prior period financial statements in order to conform to the current year presentation. These reclassifications have not changed the results of operations or equity.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The standard provides for optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected
12
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
by reference rate reform. On July 27, 2017, the Financial Conduct Authority (FCA), tasked with overseeing the London Interbank Offered Rate (LIBOR) announced the benchmark interest rate will be phased out by the end of 2023. As a result, existing and future contracts indexed to LIBOR will need to be renegotiated to reference another rate.
We adopted the standard effective as of January 1, 2020, using the optional transition method to apply the standard as of the effective date. The Trust elected to apply the optional expedients for all of the Trust’s hedging relationships. The Trust will disregard the potential change in the designated hedged risk that may occur due to reference rate reform when the Trust assesses whether the hedged forecasted transaction is probable in accordance with the requirements of Topic 815.
The Trust will continue current hedge accounting for our existing cash flow hedges when the hedged risk changes by assuming the reference rate will not be replaced for the remainder of the hedging relationships for our assessment of hedge effectiveness and all subsequent hedge effectiveness assessments.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which superseded FASB ASC Topic 840. The Trust adopted this standard effective as of January 1, 2019. In April 2020, the FASB met to discuss lease modifications guidance in Topic 842 as it relates to lease concessions amidst the Covid-19 pandemic. The FASB determined that requiring the analysis of all leases in which concessions are made would be costly and complex for both the leases and lessors. As such, the FASB has made the decision to allow companies to avoid lease modification accounting when lease concessions do not result in a significant change in cash flow. The Trust has elected to apply the lease modification guidance in Topic 842 for concessions and deferrals made during the Covid-19 pandemic as it relates to the Trust’s residential leases, as the cash flows related to these concessions and deferrals do not cause a significant change in the cash received from the leases.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.
NOTE 3 – segment reporting
We report our results in 2 reportable segments: residential and commercial properties. Our residential properties include multifamily properties. Our commercial properties include retail, office, industrial, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance, and property administrative and management fees). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees, and certain general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.
Segment Revenues and Net Operating Income
The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the years ended March 31, 2022 and 2021, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2022 | | Three months ended March 31, 2021 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Income from rental operations | | $ | 27,494 | | $ | 5,422 | | $ | 32,916 | | $ | 25,959 | | $ | 5,801 | | $ | 31,760 |
Expenses from rental operations | | | 16,508 | | | 1,678 | | | 18,186 | | | 13,847 | | | 1,504 | | | 15,351 |
Net operating income | | $ | 10,986 | | $ | 3,744 | | $ | 14,730 | | $ | 12,112 | | $ | 4,297 | | $ | 16,409 |
Depreciation and amortization | | | | | | | | | 5,782 | | | | | | | | | 5,328 |
Interest | | | | | | | | | 4,845 | | | | | | | | | 4,287 |
Administration of REIT | | | | | | | | | 1,217 | | | | | | | | | 1,201 |
Other income | | | | | | | | | (503) | | | | | | | | | (243) |
Net income | | | | | | | | $ | 3,389 | | | | | | | | $ | 5,836 |
1311
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Segment Assets and Accumulated Depreciation
| | | | | | | | | |
As of March 31, 2022 |
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Real estate investments | | $ | 707,962 | | $ | 203,515 | | $ | 911,477 |
Accumulated depreciation | | | (136,986) | | | (47,212) | | | (184,198) |
Total real estate investments, net | | $ | 570,976 | | $ | 156,303 | | $ | 727,279 |
Intangible assets, less accumulated amortization | | | 173 | | | 5,838 | | | 6,011 |
Cash and cash equivalents | | | | | | | | | 49,854 |
Restricted deposits | | | | | | | | | 11,639 |
Investment in unconsolidated affiliates | | | | | | | | | 23,852 |
Notes receivable | | | | | | | | | 6,893 |
Other assets, net | | | | | | | | | 14,734 |
Total Assets | | | | | | | | $ | 840,262 |
| | | | | | | | | |
As of December 31, 2021 |
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Real estate investments | | $ | 692,722 | | $ | 203,980 | | $ | 896,702 |
Accumulated depreciation | | | (133,100) | | | (46,055) | | | (179,155) |
Total real estate investments, net | | $ | 559,622 | | $ | 157,925 | | $ | 717,547 |
Intangible assets, less accumulated amortization | | | — | | | 6,246 | | | 6,246 |
Cash and cash equivalents | | | | | | | | | 51,507 |
Restricted deposits | | | | | | | | | 9,149 |
Investment in unconsolidated affiliates | | | | | | | | | 18,658 |
Notes receivable | | | | | | | | | 7,457 |
Other assets, net | | | | | | | | | 10,302 |
Total Assets | | | | | | | | $ | 820,866 |
Segment Revenues and Net Operating Income
The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three months ended March 31, 2021 and 2020, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2021 | | Three months ended March 31, 2020 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Income from rental operations | | $ | 25,959 | | $ | 5,801 | | $ | 31,760 | | $ | 23,995 | | $ | 5,911 | | $ | 29,906 |
Expenses from rental operations | | | 13,847 | | | 1,504 | | | 15,351 | | | 13,912 | | | 1,787 | | | 15,699 |
Net operating income | | $ | 12,112 | | $ | 4,297 | | $ | 16,409 | | $ | 10,083 | | $ | 4,124 | | $ | 14,207 |
Depreciation and amortization | | | | | | | | | 5,328 | | | | | | | | | 5,252 |
Interest | | | | | | | | | 4,287 | | | | | | | | | 4,350 |
Administration of REIT | | | | | | | | | 1,201 | | | | | | | | | 1,162 |
Other income | | | | | | | | | (243) | | | | | | | | | (1,784) |
Net income | | | | | | | | $ | 5,836 | | | | | | | | $ | 5,227 |
Segment Assets and Accumulated Depreciation
| | | | | | | | | |
As of March 31, 2021 |
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Real estate investments | | $ | 647,519 | | $ | 200,571 | | $ | 848,090 |
Accumulated depreciation | | | (122,143) | | | (43,057) | | | (165,200) |
| | $ | 525,376 | | $ | 157,514 | | | 682,890 |
Cash and cash equivalents | | | | | | | | | 13,888 |
Restricted deposits and funded reserves | | | | | | | | | 16,459 |
Investment in unconsolidated affiliates | | | | | | | | | 11,664 |
Note receivable | | | | | | | | | 2,009 |
Assets held for sale | | | | | | | | | 830 |
Intangible assets, less accumulated amortization | | | | | | | | | 7,075 |
Other assets, net | | | | | | | | | 10,449 |
Total Assets | | | | | | | | $ | 745,264 |
| | | | | | | | | |
As of December 31, 2020 |
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Real estate investments | | $ | 647,083 | | $ | 198,205 | | $ | 845,288 |
Accumulated depreciation | | | (118,363) | | | (42,212) | | | (160,575) |
| | $ | 528,720 | | $ | 155,993 | | | 684,713 |
Cash and cash equivalents | | | | | | | | | 11,716 |
Restricted deposits and funded reserves | | | | | | | | | 15,919 |
Investment in unconsolidated affiliates | | | | | | | | | 9,659 |
Note receivable | | | | | | | | | 2,026 |
Assets held for sale | | | | | | | | | 831 |
Intangible assets, less accumulated amortization | | | | | | | | | 7,367 |
Other assets, net | | | | | | | | | 10,798 |
Total Assets | | | | | | | | $ | 743,029 |
14
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 4 – restricted deposits and funded reserves
| | | | | | | | | |
| | | |
| As of March 31, | | As of December 31, | ||
| | | | | 2021 | | 2020 | ||
| | | | | (in thousands) | ||||
Tenant security deposits | | | | | $ | 4,885 | | $ | 4,730 |
Real estate tax and insurance escrows | | | | | | 1,158 | | | 2,058 |
Replacement reserves | | | | | | 2,094 | | | 2,137 |
Other funded reserves | | | | | | 8,322 | | | 6,994 |
| | | | | $ | 16,459 | | $ | 15,919 |
The following table summarizes the Trust’s restricted deposits and funded reserves.
| | | | | | | | | |
| | | |
| As of March 31, | | As of December 31, | ||
| | | | | 2022 | | 2021 | ||
| | | | | (in thousands) | ||||
Tenant security deposits | | | | | $ | 5,490 | | $ | 5,165 |
Real estate tax and insurance escrows | | | | | | 877 | | | 1,355 |
Replacement reserves | | | | | | 1,808 | | | 1,791 |
Other funded reserves | | | | | | 3,464 | | | 838 |
| | | | | $ | 11,639 | | $ | 9,149 |
Tenant Security Deposits
We have set aside funds to repay tenant security deposits upon tenant move-out.
Real Estate Tax and Insurance Escrows
Pursuant to the terms of certain mortgages, we have established and maintain real estate tax escrows and insurance escrows to pay real estate taxes and insurance. We are required to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums.
Replacement Reserves
Pursuant to the terms of certain mortgages, we have established and maintain several replacement reserve accounts. We make monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals.
Other Funded Reserves
Other funded reserves consist of proceeds received on the disposal of a commercial building located in Bismarck, North Dakota. The proceeds are required to be held as restricted funds under Section 1031 of the Internal Revenue Code (like-kind exchange).
Additionally, insurance proceeds of $1,324 that were received during the three months ended March 31, 2021, are held in an escrow account per the agreement set in place with the lender of the property. Funds will be released as construction costs related to the insurance claim are incurred.
1512
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 5 – INVESTMENT IN UNCONSOLIDATED AFFILIATES
The Company’s investments in unconsolidated real estate ventures, are summarized as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | | | Total Investment in Unconsolidated Affiliates at | ||||
Unconsolidated Affiliates | | | Date Acquired | | | Trust Ownership Interest | | March 31, | | December 31, 2021 | ||
Banner Building | | | 2007 | | | 66.67% | | $ | 4,082 | | $ | 60 |
Grand Forks INREIT, LLC | | | 2003 | | | 50% | | | 2,442 | | | 2,493 |
SE Savage, LLC | | | 2019 | | | 60% | | | 2,324 | | | 2,946 |
SE Maple Grove, LLC | | | 2019 | | | 60% | | | 2,303 | | | 2,823 |
SE Rogers, LLC | | | 2020 | | | 60% | | | 2,961 | | | 2,986 |
ST Oak Cliff, LLC | | | 2021 | | | 70% | | | 6,725 | | | 4,324 |
SE Brooklyn Park, LLC | | | 2021 | | | 60% | | | 3,015 | | | 3,026 |
| | | | | | | | $ | 23,852 | | $ | 18,658 |
| | | | | | | | | |
Unconsolidated Affiliates | | | Date Acquired | | | Trust Ownership Interest | | | Total Investment in Unconsolidated Affiliates |
Banner Building | | | 2007 | | | 66.67% | | $ | 59 |
Grand Forks Market Place Retail Center | | | 2003 | | | 50% | | | 2,429 |
SE Savage, LLC | | | 2019 | | | 60% | | | 3,168 |
SE Maple Grove, LLC | | | 2019 | | | 60% | | | 2,942 |
SE Rogers, LLC | | | 2020 | | | 60% | | | 3,066 |
| | | | | | | | $ | 11,664 |
The Operating Partnership owns a 66.67% interest as tenant in common in an office building in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at March 31, 2022 and December 31, 2021 of $- and $6,022, respectively.
The Operating Partnership is a 50% owner of Grand Forks Marketplace Retail Center as a tenant in common through 100% ownership in a limited liability company. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial spaceThe property is located in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at March 31, 20212022 and December 31, 20202021 of $9,975$9,730 and $10,036, respectively. The Trust is jointly and severally liable for the full mortgage balance.
The Operating Partnership is a 66.67% owner of Banner Building as a tenant in common. The office building has approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $6,181 and $6,232, respectively. The Trust is jointly and severally liable for the full mortgage balance.
Based upon the facts and circumstances at formation of the tenant in common investments, the Trust determined that they are not VIEs. As a result, the Trust used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate the tenants in common and joint ventures. Based upon each member's substantive participating rights over the activities of each entity as stipulated in the operating agreements, the tenants in common are not consolidated by the Trust and are accounted for under the equity method of accounting. The Trust’s investments in the tenants in common are included in Investment in unconsolidated affiliates, at equity, on the Trust’s consolidated balance sheets and the Trust’s earnings from its investments in the unconsolidated affiliates are presented in Equity in earnings (losses) of real estate investments on the Trust’s consolidated statements of operations.
The LLC interests discussed below are deemed to be variable interests in VIEs and, based on an evaluation of the variable interests against the criteria for consolidation, the Trust determined that it is not the primary beneficiary of the investments, as the Trust does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIEs is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Trust’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon liquidation of the investment at book value in accordance with the operating agreements. The Trust's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.
The Operating Partnership owns a 60% interest in a limited liability company that is currently developing a 190-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $2,077 in cash to SE Savage. SE Savage is located in Savage, Minnesota, with total assets of $32,133 and $27,015 as of March 31, 2021 and December 31, 2020, respectively. Current expectations are that the project will be completed in the fourth quarter of 2021 and the current
16
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
project budget approximates $37,800 of which $29,117 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage with a balance at March 31, 2021 and December 31, 2020 of $24,786 and $19,436,$9,794, 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 developingholds a 160-unit multifamily property. As of March 31, 2021, the Operating Partnership has contributed $2,975 in cash to SE Maple Grove. SE Maple Grove is located in Maple Grove, Minnesota, with total assets of $18,331 and $13,106 as of March 31, 2021 and December 31, 2020. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $33,000 of which $16,242 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage with a balance at March 31, 2022 of $31,000. The Trust is jointly and severally liable for the full mortgage balance. At December 31, 2021, the property was encumbered by a first mortgage of $26,210 and a second mortgage to Sterling Properties, LLLP of $6,129. Additionally, at March 31, 2022, a Promissory Note and Loan Agreement was entered into between SE Savage, LLC, the Borrower, and Sterling Properties, LLLP, the Lender, for $1,397, and is an unsecured obligation of the Borrower. The note is considered to be additional at-risk funds to the Operating Partnership, in SE Savage, LLC, and is included in Notes Receivable on the Consolidated Balance Sheet at March 31, 2022.
The Operating Partnership owns a 60% interest in a limited liability company that that holds a multifamily property. The entity is encumbered by a first mortgage with a balance at both March 31, 2022 and December 31, 20202021 of $11,335$24,788. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at March 31, 2022 and $5,710,December 31, 2021 of $2,878 and $727, respectively.
The Operating Partnership owns a 60% interest in a limited liability company that is currently developing a multifamily property. The LLC holds land located in Rogers, Minnesota, with total assets of $27,231 and $22,847 at March 31, 2022 and December 31, 2021, respectively. The Trustentity is encumbered by a first mortgage that has a balance of $20,631 and $15,688 at March 31, 2022 and December 31, 2021, respectively. The Company is jointly and severally liable for the full mortgage balance.
The Operating Partnership owns a 60%70% interest in a limited liability company, that intends to developwith a 165-unitrelated party. The entity is currently developing a multifamily property. As of March 31, 2022 and December 31, 2021, the Operating Partnership has contributed $3,089$6,778 and $4,361, respectively, in cash to SE Rogers. SE Rogersthe entity. The entity holds land located in Rogers, Minnesota,Dallas, Texas with total assets of $5,761 and $4,161 as of March 31, 2021 and December 31, 2020, respectively. Current expectations are that the project will be completed in the second quarter of 2022 and the current project budget approximates $34,300 of which $5,478 has been incurred as of March 31, 2021. The property is encumbered by a first mortgage that has 0 balance at March 31, 2021 and December 31, 2020. The Company is jointly and severally liable for the full mortgage balance.
The amounts reflected in the following table are based on the historical financial information of the unconsolidated affiliates.
The following is a summary of the financial position of the unconsolidated affiliates as of March 31, 2021 and December 31, 2020.
| | | | | | |
|
| March 31, 2021 |
| December 31, 2020 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | $ | 86,983 | | $ | 74,991 |
Accumulated depreciation | | | (9,939) | | | (9,692) |
| | | 77,044 | | | 65,299 |
Cash and cash equivalents | | | 282 | | | 249 |
Restricted deposits and funded reserves | | | 192 | | | 384 |
Other assets, net | | | 296 | | | 180 |
Total Assets | | $ | 77,814 | | $ | 66,112 |
| | | | | | |
LIABILITIES | | | | | | |
Mortgage notes payable, net | | $ | 51,016 | | $ | 41,405 |
Tenant security deposits payable | | | 17 | | | 2 |
Accrued expenses and other liabilities | | | 6,543 | | | 6,533 |
Total Liabilities | | $ | 57,576 | | $ | 47,940 |
SHAREHOLDERS' EQUITY | | | | | | |
Total Shareholders' Equity | | $ | 20,238 | | $ | 18,172 |
| | | | | | |
| | $ | 77,814 | | $ | 66,112 |
| | | | | | |
1713
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
assets of $11,711 and $7,394 at March 31, 2022 and December 31, 2021, respectively. The entity is encumbered by a construction mortgage. There is 0 balance outstanding related to the mortgage at March 31, 2022. The Company is jointly and severally liable for the full mortgage balance.
The Operating Partnership owns a 60% interest in a limited liability company, with an unrelated third party. The entity is currently developing a multifamily property. As of both March 31, 2022 and December 31, 2021, the Operating Partnership has contributed $3,042 in cash to the LLC. The entity is located in Brooklyn Park, Minnesota, with total assets of $13,957 and $5,478 at March 31, 2022 and December 31, 2021, respectively. The entity is encumbered by a first mortgage that has a balance of $6,861 at March 31, 2022. There was 0 balance outstanding related to the first mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.
The following is a summary of the financial position of the unconsolidated affiliates at March 31, 2022 and December 31, 2021.
| | | | | | |
|
| March 31, |
| December 31, 2021 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | $ | 152,403 | | $ | 134,839 |
Accumulated depreciation | | | (12,767) | | | (10,940) |
| | | 139,636 | | | 123,899 |
Cash and cash equivalents | | | 1,213 | | | 1,131 |
Restricted deposits | | | 574 | | | 650 |
Intangible assets, less accumulated amortization | | | 145 | | | 41 |
Other assets, net | | | 349 | | | 909 |
Total Assets | | $ | 141,917 | | $ | 126,630 |
| | | | | | |
LIABILITIES | | | | | | |
Mortgage notes payable, net | | $ | 95,843 | | $ | 87,996 |
Tenant security deposits payable | | | 125 | | | 108 |
Accrued expenses and other liabilities | | | 7,665 | | | 8,029 |
Total Liabilities | | $ | 103,633 | | $ | 96,133 |
SHAREHOLDERS' EQUITY | | | | | | |
Total Shareholders' Equity | | $ | 38,284 | | $ | 30,497 |
| | | | | | |
Total liabilities and shareholders' equity | | $ | 141,917 | | $ | 126,630 |
The following is a summary of results of operations of the unconsolidated affiliates for the three months ended March 31, 20212022 and 2020.2021.
| | | | | | |
| | Three months ended | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Income from rental operations | | $ | 1,730 | | $ | 880 |
Expenses from rental operations | | | 812 | | | 234 |
Net operating income | | $ | 918 | | $ | 646 |
Depreciation and Amortization | | | 1,827 | | | 247 |
Interest | | | 1,012 | | | 417 |
Other expense | | | 10 | | | - |
Net loss | | $ | (1,931) | | $ | (18) |
14
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
| | | | | | |
| | Three months ended March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Income from rental operations | | $ | 880 | | $ | 963 |
Expenses from rental operations | | | 234 | | | 259 |
Net operating income | | $ | 646 | | $ | 704 |
Depreciation and Amortization | | | 247 | | | 171 |
Interest | | | 417 | | | 244 |
Net (loss) income | | $ | (18) | | $ | 289 |
NOTE 6 - Lease intangibles
The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:
| | | | | | | | | | | | | | | | | | |
| | Lease | | Accumulated | | Lease | | Lease | | Accumulated | | Lease | ||||||
As of March 31, 2021 |
| Intangibles |
| Amortization |
| Intangibles, net | ||||||||||||
As of March 31, 2022 |
| Intangibles |
| Amortization |
| Intangibles, net | ||||||||||||
Lease Intangible Assets | | (in thousands) | | (in thousands) | ||||||||||||||
In-place leases | | $ | 18,965 | | $ | (13,177) | | $ | 5,788 | | $ | 15,462 | | $ | (10,533) | | $ | 4,929 |
Above-market leases | | | 2,617 | | | (1,330) | | | 1,287 | | | 2,466 | | | (1,384) | | | 1,082 |
| | $ | 21,582 | | $ | (14,507) | | $ | 7,075 | | $ | 17,928 | | $ | (11,917) | | $ | 6,011 |
Lease Intangible Liabilities | | | | | | | | | | | | | | | | | | |
Below-market leases | | $ | (2,881) | | $ | 1,934 | | $ | (947) | | $ | (2,525) | | $ | 1,759 | | $ | (766) |
| | | | | | | | | | | | | | | | | | |
| | Lease | | Accumulated | | Lease | | Lease | | Accumulated | | Lease | ||||||
As of December 31, 2020 |
| Intangibles |
| Amortization |
| Intangibles, net | ||||||||||||
As of December 31, 2021 |
| Intangibles |
| Amortization |
| Intangibles, net | ||||||||||||
Lease Intangible Assets | | (in thousands) | | (in thousands) | ||||||||||||||
In-place leases | | $ | 19,768 | | $ | (13,727) | | $ | 6,041 | | $ | 15,455 | | $ | (10,381) | | $ | 5,074 |
Above-market leases | | | 2,618 | | | (1,292) | | | 1,326 | | | 2,617 | | | (1,445) | | | 1,172 |
| | $ | 22,386 | | $ | (15,019) | | $ | 7,367 | | $ | 18,072 | | $ | (11,826) | | $ | 6,246 |
Lease Intangible Liabilities | | | | | | | | | | | | | | | | | | |
Below-market leases | | $ | (2,957) | | $ | 1,963 | | $ | (994) | | $ | (2,525) | | $ | 1,714 | | $ | (811) |
The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
| | | | | | |
| | Intangible | | Intangible | ||
Years ending December 31, |
| Assets |
| Liabilities | ||
| | (in thousands) | ||||
2022 (April 1, 2022 - December 31, 2022) | | $ | 872 | | $ | 119 |
2023 | | | 827 | | | 151 |
2024 | | | 827 | | | 151 |
2025 | | | 827 | | | 151 |
2026 | | | 676 | | | 80 |
Thereafter | | | 1,982 | | | 114 |
| | $ | 6,011 | | $ | 766 |
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 March 31, 2022, the Bremer Bank 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. The Trust anticipates renewing the line of credit expiring in the next 12 months to continue to hold it as a cash resource to the Trust. There were 0 balances outstanding on either line at March 31, 2022 or December 31, 2021.
Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.
1815
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
| | | | | | |
| | Intangible | | Intangible | ||
Years ending December 31, |
| Assets |
| Liabilities | ||
| | (in thousands) | ||||
2021 (April 1, 2021 - December 31, 2021) | | $ | 829 | | $ | 137 |
2022 | | | 987 | | | 164 |
2023 | | | 849 | | | 151 |
2024 | | | 849 | | | 151 |
2025 | | | 849 | | | 151 |
Thereafter | | | 2,712 | | | 193 |
| | $ | 7,075 | | $ | 947 |
The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of March 31, 2021 was 7.2 years.
When acquiring property, the portion of the purchase price allocated to in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Trust incurred amortization expense pertaining to acquired in-place lease value intangibles of $253 and $341 for the three months ended March 31, 2021 and 2020, respectively.
When acquiring property, the portion of the purchase price allocated to above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $39 and $52 for the three months ended March 31, 2021 and 2020, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $47 and $56 for the three months ended March 31, 2021 and 2020, respectively, was recorded as an increase to real estate rental income.
NOTE 7 – LINES OF CREDIT
We have a $18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2021; a $4,915 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires in June 2022; and a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires June 2022. The lines of credit are secured by specific properties. At March 31, 2021, the $4,915 variable rate line of credit with Bremer Bank secured 2 letters of credit totaling $746, leaving $27,469 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances.
Certain line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. We are not required to determine compliance with all covenants as of March 31, 2021; however, we have not received any notice of non-compliance with our covenants through the date of this filing.
19
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 8 - MORTGAGE NOTES PAYABLE
The following table summarizes the Trust’s mortgage notes payable.
| | | | | | | | | | | | |
| | Principal Balance At | | Principal Balance At | ||||||||
| | March 31, | | December 31, | | March 31, | | December 31, | ||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Fixed rate mortgage notes payable (a) | | $ | 419,700 | | $ | 415,665 | | $ | 499,349 | | $ | 490,413 |
Variable rate mortgage notes payable | | | 7,368 | | | 7,446 | | | 5,237 | | | 5,237 |
Mortgage notes payable | | | 427,068 | | | 423,111 | | | 504,586 | | | 495,650 |
Less unamortized debt issuance costs | | | 1,904 | | | 1,833 | | | 2,446 | | | 2,508 |
| | $ | 425,164 | | $ | 421,278 | | $ | 502,140 | | $ | 493,142 |
(a) | Includes |
As of March 31, 2021, we had 107 fixed rate and 2 variable rate mortgage loans with effective interest rates ranging from 2.11% to 6.85% per annum and a weighted average effective interest rate of 4.01% per annum on fixed rate loans and 2.25% per annum on variable rate loans.
As of December 31, 2020, we had 114 fixed rate and 2 variable rate mortgage loans with effective interest rates ranging from 2.14% to 6.85% per annum, and a weighted average effective interest rate of 4.03% per annum on fixed rate loans and 2.28% per annum on variable rate loans.
The majority of the Trust’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs. Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits.
Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. We are not required to determine compliance with all covenants as of March 31, 2021; however, we have not received any notice of non-compliance with our covenants through the date of this filing.
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) | ||
2021 (April 1, 2021 - December 31, 2021) | | $ | 15,835 | |||
2022 | | | 27,109 | |||
2022 (April 1, 2022 - December 31, 2022) | | $ | 18,273 | |||
2023 | | | 50,417 | | | 52,706 |
2024 | | | 19,421 | | | 22,279 |
2025 | | | 51,057 | | | 52,734 |
2026 | | | 45,131 | |||
Thereafter | | | 263,229 | | | 313,463 |
Total payments | | $ | 427,068 | | $ | 504,586 |
20
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 9 – DERIVATIVES AND HEDGING ACTIVITIES
As part of our interest rate risk management strategy, we have used derivative instruments to manage our exposure to interest rate movements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Trust making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.
As of March 31, 2021,2022, the Trust used 912 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 ninetwelve months, the Trust estimates that an additional $269$1,137 will be reclassified as aan interest expense.
16
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The following table summarizes the Trust’s interest rate swaps as of March 31, 2021,2022, which effectively convert on month floating rate LIBOR to a fixed rate:
| | | | | | | | | | | | |
| | | | Fixed | | | | | | Fixed | | |
Effective Date | | Notional | | Interest Rate | | Maturity Date | | Notional | | Interest Rate | | Maturity Date |
November 1, 2019 | $ | 6,928 | | 3.15% | | November 1, 2029 | $ | 6,780 | | 3.15% | | November 1, 2029 |
November 1, 2019 | $ | 4,814 | | 3.28% | | November 1, 2029 | $ | 4,677 | | 3.28% | | November 1, 2029 |
January 10, 2020 | $ | 3,130 | | 3.39% | | January 10, 2030 | $ | 3,044 | | 3.39% | | January 10, 2030 |
June 11, 2020 | $ | 1,568 | | 3.07% | | June 15, 2030 | $ | 1,524 | | 3.07% | | June 15, 2030 |
June 11, 2020 | $ | 3,039 | | 3.07% | | June 15, 2030 | $ | 2,953 | | 3.07% | | June 15, 2030 |
June 15, 2020 | $ | 1,700 | | 2.94% | | June 15, 2030 | $ | 1,651 | | 2.94% | | June 15, 2030 |
June 15, 2020 | $ | 4,498 | | 2.94% | | June 15, 2030 | $ | 4,369 | | 2.94% | | June 15, 2030 |
July 1, 2020 | $ | 4,931 | | 2.79% | | June 10, 2030 | $ | 4,825 | | 2.79% | | June 10, 2030 |
December 2, 2020 | $ | 12,800 | | 2.91% | | December 2, 2027 | $ | 12,626 | | 2.91% | | December 2, 2027 |
July 1, 2021 | $ | 26,119 | | 2.99% | | July 1, 2031 | ||||||
November 10, 2021 | $ | 28,465 | | 3.54% | | August 1, 2029 | ||||||
December 1, 2021 | $ | 11,028 | | 3.32% | | December 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 | | Number of Instruments | | Notional | ||||||||
Interest Rate Derivatives | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
Interest rate swaps | | 9 | | 9 | $ | 43,408 | $ | 43,613 | | 12 | | 12 | $ | 108,061 | $ | 108,734 |
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 910 to the consolidated financial statements.
| | | | | | | | | | | | | | | | |
| | Derivatives | | Derivatives | ||||||||||||
Derivatives designated as | | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 | ||||||||
cash flow hedges: | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Interest rate swaps | | Other assets, net | $ | 921 | | Other assets, net | $ | — | | Other assets, net | $ | 5,574 | | Other assets, net | $ | 698 |
Interest rate swaps | | Accrued expenses and other liabilities | $ | 342 | | Accrued expenses and other liabilities | $ | 1,805 | | Accrued expenses and other liabilities | $ | — | | Accrued expenses and other liabilities | $ | 1,648 |
The carrying amount of the swaps have been adjusted to their fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting an asset and liability for the fair value of the future net payments forecasted under the swap. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income.
2117
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
forecasted under the swap. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income.
The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended March 31, 20212022 and 2020:2021:
| | | | | | | ||||||
| | | | | | | | | | | | |
| | | | 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 | | Three Months Ended | | on Derivatives | | (AOCI) into Income | | AOCI into Income |
| | 2021 | | | | 2021 | | 2022 | | | | 2022 |
Interest rate swaps | $ | (2,384) | | Interest expense | $ | 115 | $ | (6,524) | | Interest expense | $ | 361 |
| | 2020 | | | | 2020 | | 2021 | | | | 2021 |
Interest rate swaps | $ | 1,486 | | Interest expense | $ | 10 | $ | (2,384) | | Interest expense | $ | 115 |
Credit-risk-related Contingent Features
The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Trust could also be declared in default on its corresponding derivative obligation. The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of March 31, 2021,2022, the termination value of derivatives in a liabilityan asset position was $342.$5,574. As of March 31, 2021,2022, the Trust has pledged the properties related to the loans which are hedged as collateral.
NOTE 10 - FAIR VALUE MEASUREMENT
The following table presents the carrying value and estimated fair value of the Company’s financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 | ||||||||||||||||
| | Carrying | | | | | Carrying | | | | | Carrying | | | | | Carrying | | | | ||||
|
| Value |
| Fair Value |
| Value |
| Fair Value |
| Value |
| Fair Value |
| Value |
| Fair Value | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Note receivable | | $ | 2,009 | | $ | 2,091 | | $ | 2,026 | | $ | 2,117 | ||||||||||||
Notes receivable | | $ | 6,893 | | $ | 7,919 | | $ | 7,457 | | $ | 9,840 | ||||||||||||
Derivative assets | | $ | 921 | | $ | 921 | | $ | — | | $ | — | | $ | 5,574 | | $ | 5,574 | | $ | 698 | | $ | 698 |
| | | | | ||||||||||||||||||||
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage notes payable | | $ | 427,069 | | $ | 451,910 | | $ | 423,111 | | $ | 443,100 | | $ | 504,586 | | $ | 520,213 | | $ | 495,650 | | $ | 508,285 |
Derivative liabilities | | $ | 342 | | $ | 342 | | $ | 1,805 | | $ | 1,805 | | $ | — | | $ | — | | $ | 1,648 | | $ | 1,648 |
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.
2218
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.
These two types of inputs create the following fair value hierarchy:
● | Level 1 – Quoted prices for identical instruments in active |
● | 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 |
● | Level 3 – Instruments whose significant inputs are unobservable. |
The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Company’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.
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| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
| | (in thousands) | | (in thousands) | ||||||||||||||||||||
March 31, 2021 | | | | | | | | | | | | | ||||||||||||
March 31, 2022 | | | | | | | | | | | | | ||||||||||||
Derivative assets | | $ | — | | $ | 5,574 | | $ | — | | $ | 5,574 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
December 31, 2021 | | | | | | | | | | | | | ||||||||||||
Derivative assets | | $ | — | | $ | 921 | | $ | — | | $ | 921 | | $ | — | | $ | 698 | | $ | — | | $ | 698 |
Derivative liabilities | | $ | — | | $ | 342 | | $ | — | | $ | 342 | | $ | — | | $ | 1,648 | | $ | — | | $ | 1,648 |
| | | | | | | | | | | | | ||||||||||||
December 31, 2020 | | | | | | | | | | | | | ||||||||||||
Derivative liabilities | | $ | — | | $ | 1,805 | | $ | — | | $ | 1,805 |
Derivatives: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative.
The Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements.
23
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Fair Value Disclosures
The following table presents the Company’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
| | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | | | | | | | | | | | |
| | (in thousands) | ||||||||||
March 31, 2021 | | | | | | | | | | | | |
Mortgage notes payable, net | | $ | — | | $ | — | | $ | 451,910 | | $ | 451,910 |
Note receivable | | $ | — | | $ | — | | $ | 2,091 | | $ | 2,091 |
December 31, 2020 | | | | | | | | | | | | |
Mortgage notes payable, net | | $ | — | | $ | — | | $ | 443,100 | | $ | 443,100 |
Note receivable | | $ | — | | $ | — | | $ | 2,117 | | $ | 2,117 |
| | | | | | | | | | | | |
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| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
March 31, 2022 | | | | | | | | | | | | |
Mortgage notes payable | | $ | — | | $ | — | | $ | 520,213 | | $ | 520,213 |
Notes receivable | | $ | — | | $ | — | | $ | 7,919 | | $ | 7,919 |
December 31, 2021 | | | | | | | | | | | | |
Mortgage notes payable | | $ | — | | $ | — | | $ | 508,285 | | $ | 508,285 |
Notes receivable | | $ | — | | $ | — | | $ | 9,840 | | $ | 9,840 |
19
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022 and 2021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Mortgage notes payable: The 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 Company for similar debt instruments of comparable maturities by the Company’s lenders. The rates used range from 3.05%3.40% to 3.15%3.50% and from 3.25% to 3.35% at March 31, 20212022 and December 31, 2020,2021, respectively.
Notes receivable.receivable: The Trust estimates the fair value of its notes receivable by discounting future cash flows of each instrument at rates currently offered to the Trust for similar note instruments of comparable maturities by the Trust’s lenders. The ratesrate used range from 3.05% to 3.15%was 7.25% at March 31, 2022 and ranged from 3.25% to 3.35% at March 31, 2021 and December 31, 2020, respectively.2021.
NOTE 11 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP
As of March 31, 2021 and December 31, 2020, outstanding limited partnership units totaled 18,246,000 and 18,279,000, respectively. Total aggregate distributions per unit were $0.2650 and $0.2647 during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and 2020, the Operating Partnership declared first quarter distributions of $4,835 and $4,831, respectively, to limited partners paid on April 15, 2021 and 2020, respectively.
During the three months ended March 31, 2021 and 2020, there were 0 limited partnership units exchanged for common shares pursuant to redemption requests.
At the sole and absolute discretion of the Trust as general partner of the limited partnership, and so long our redemption plans exists and applicable holding periods are met,Limited Partners may request the Operating Partnership redeem their limited partnership units. The Trust as general partner on behalf of the limited partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, or (ii) offer shares in lieu of cash for the redemption on a basis of one limited partnership unit for 1 Sterling common share (the “Exchange Request”). The Exchange Request shall be exercised pursuant to a Notice of Exchange. If the issuance of Sterling common shares pursuant to an Exchange Request will cause the shareholder to exceed the ownership limitations, among other reasons, payment will be made to the Limited Partner in cash. No Limited Partner may exercise an Exchange Request more than twice during any calendar year, and Exchange Requests may not be made for less than 1,000 limited partnership units. If a Limited Partner owns fewer than 1,000 limited partnership units, all of the limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.
24
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 12 – REDEMPTION PLANS
Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our Operating Partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans. Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $40,000 worth of securities. Currently, the fixed redemption price is $19.00 per share or unit under the plans, which price became effective January 1, 2021. Prior to January 1, 2021 the redemption price was $18.25 per share or unit under the plan.
We may redeem securities under the plans provided that the aggregate total has not been exceeded and we have sufficient funds to do so. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plans, either or both of them, if it determines to do so in its sole discretion.
During the three months ended March 31, 2021 and 2020, the Company redeemed 41,000 and 38,000 common shares valued at $777 and $696, respectively. In addition, during the three months ended March 31, 2021 and 2020, the Trust redeemed 33,000 and 30,000 units valued at $628 and $541, respectively. The total amount remaining available under the plan as of March 31, 2021 is $5,920 worth of securities.
NOTE 13 – BENEFICIAL INTEREST
We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of March 31, 2021 and December 31, 2020, there were 9,968,000 and 9,855,000 common shares outstanding, respectively. We had 0 preferred shares outstanding as of either date.
Dividends paid to holders of common shares were $0.2650 per share and $0.2647 per share for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and 2020, the Operating Partnership declared first quarter dividends of $2,642 and $2,527, respectively, to holders of common shares paid on April 15, 2021 and 2020, respectively.
NOTE 14 – DIVIDEND REINVESTMENT PLAN
Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges.
The estimated value per common share was $20.00 and $19.25 at March 31, 2021 and December 31, 2020, respectively. See discussion of determination of estimated value in Management Discussion and Analysis.
Therefore, the purchase price per common share for dividend reinvestments was $19.00 and $18.29 and for additional optional cash purchases was $20.00 and $19.25 at March 31, 2021 and December 31, 2020, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten day notice to participants.
In the three months ended March 31, 2021, 89,000 shares were issued pursuant to dividend reinvestments and 65,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $1,686 and $1,307 respectively.
25
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
In the three months ended March 31, 2020, 87,000 shares were issued pursuant to dividend reinvestments and 62,000 shares were issued pursuant to additional optional cash purchases under the plan, valued at $1,584 and $1,203, respectively.
NOTE 1511 – LEASES
As of March 31, 2021,2022, we derived 82%83.5% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related items such as parking, storage, and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.
As of March 31, 2021,2022, we derived 18%16.5% 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 containWe 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 and non-lease components for utilityagreements. When we pay pass-through expenses, subject to reimbursement from our residents. We have elected to combine lease and non-lease components for all asset classes. The combined componentsby the tenant, they are included inwithin operating expenses, excluding real estate taxes, and reimbursements are included within “real estate rental incomeincome” along with the associated base rent in ourthe accompanying consolidated financial statements and are accounted for under ASC 842..
Lease income related to the Company’s operating leases is comprised of the following:
| | | | | | | | | |
| | Three months ended March 31, 2021 | |||||||
|
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Lease income related to fixed lease payments | | $ | 24,834 | | $ | 4,382 | | $ | 29,216 |
Lease income related to variable lease payments | | | — | | | 1,094 | | | 1,094 |
Other (a) | | | (135) | | | 294 | | | 159 |
Lease Income (b) | | $ | 24,699 | | $ | 5,770 | | $ | 30,469 |
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2020 | | Three months ended March 31, 2022 | ||||||||||||||
|
| Residential |
| Commercial |
| Total |
| Residential |
| Commercial |
| Total | ||||||
| | (in thousands) | | (in thousands) | ||||||||||||||
Lease income related to fixed lease payments | | $ | 23,203 | | $ | 4,714 | | $ | 27,917 | | $ | 26,498 | | $ | 4,067 | | $ | 30,565 |
Lease income related to variable lease payments | | | — | | | 1,261 | | | 1,261 | | | — | | | 1,176 | | | 1,176 |
Other (a) | | | (257) | | | (90) | | | (347) | | | (169) | | | 95 | | | (74) |
Lease Income (b) | | $ | 22,946 | | $ | 5,885 | | $ | 28,831 | | $ | 26,329 | | $ | 5,338 | | $ | 31,667 |
(a) | For the three months ended March 31, |
(b) | Excludes other rental income for the three months ended March 31, |
2620
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
| | | | | | | | | |
| | Three months ended March 31, 2021 | |||||||
|
| Residential |
| Commercial |
| Total | |||
| | (in thousands) | |||||||
Lease income related to fixed lease payments | | $ | 24,834 | | $ | 4,382 | | $ | 29,216 |
Lease income related to variable lease payments | | | — | | | 1,094 | | | 1,094 |
Other (c) | | | (135) | | | 294 | | | 159 |
Lease Income (d) | | $ | 24,699 | | $ | 5,770 | | $ | 30,469 |
(c) | For the three months ended March 31, 2021, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements. |
(d) | Excludes other rental income for the three months ended March 31, 2021 of $1,291, respectively, which is accounted for under the revenue recognition standard. |
As of March 31, 2021,2022, non-cancelable commercial operating leases provide for future minimum rental income as follows. Apartment leases are not included as the terms are generally for one year or less.
| | | | | | |
Years ending December 31, |
| Amount |
| Amount | ||
| | (in thousands) | | (in thousands) | ||
2021 (April 1, 2021 - December 31, 2021) | | $ | 11,658 | |||
2022 | | | 14,789 | |||
2022 (April 1, 2022- December 31, 2022) | | $ | 11,715 | |||
2023 | | | 13,454 | | | 15,123 |
2024 | | | 12,737 | | | 14,447 |
2025 | | | 12,491 | | | 14,272 |
2026 | | | 13,015 | |||
Thereafter | | | 56,308 | | | 54,882 |
| | $ | 121,437 | | $ | 123,454 |
NOTE 1612 – RELATED PARTY TRANSACTIONS
Effective January 1, 2021, Alloy Enterprises, Inc. was formed to act as the holding company for Sterling Management, LLC and GOLDMARK Property Management. In connection with this restructuring transaction, the owners of Alloy Enterprises, Inc. indirectly own Sterling Management, LLC and GOLDMARK Property Management. Alloy Enterprises, Inc. is owned in part by the Trust’s Chief Executive Officer and Trustee Mr. Kenneth P. Regan, by Trustee Mr. James S. Wieland, by President Joel Thomsen, by Chief Investment Officer, Ryan M. Downs, and by the Chief Financial Officer and Treasurer Erica J. Chaffee. In addition, Mr. Regan serves as the Executive Chairman of the Advisor, and Messrs. Wieland, Thomsen, and Downs and Ms. Chaffee serve on the Board of Governors of both the Advisor and GOLDMARK Property Management.
Sterling Management, LLC,(the “Advisor”), 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., a North Dakota limited liability company formed in 1981. GOLDMARK Property Management performs property management services for the Trust.
We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. A family member of Erica J. Chaffee, our Chief Financial Officer,
The Trust has a historical and ongoing relationship with Trumont Group and Trumont Construction. Trumont Group provides development services for current joint venture projects the Operating Partnership is an employee of Bell Bankinvestor in. Trumont Construction has been engaged to construct the properties associated with these joint ventures. Mr. Regan, Chief Executive Officer and could have an indirecttrustee, is a partner in both Trumont Group and Trumont Construction and has a direct material interest in any such engagement andor related transactions.
Property Management Fee
Duringtransaction, the three months ended March 31, 2021 and 2020, we paid property management and administrative fees to GOLDMARK Property Management, Inc. For the three months ended March 31, 2021 and 2020, we paid management fees, on-site staff costs and other miscellaneous fees required to run the property of $3,064 and $3,311, respectively, to GOLDMARK Property Management, Inc. Management fees paid during the three months ended March 31, 2021 and 2020 approximated 5% of net collected rents. In addition, during the three months ended March 31, 2021 and 2020, we paid repair and maintenance expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling $1,696 and $1,627, respectively.Trust enters into, with these entities.
2721
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Board of Trustee FeesProperty Management Fee
We incurred Trustee fees of $15 and $20 duringDuring the three monthsyear ended March 31, 2022 and 2021, we paid fees to GOLDMARK Property Management, Inc. related to the management of properties, on-site staff costs and 2020,other miscellaneous fees required to run the property of $3,429 and $3,064, respectively. As ofManagement fees paid during the year ended March 31, 2022 and 2021 approximated 5% of net collected rents. In addition, during the year ended March 31, 2022 and December 31, 20202021, we owed our Trustees $42paid repair and $27 for unpaid board of trustee fees,maintenance expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling $1,799 and $1,696, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees a specific number of common shares for meetings attended.
The plan provides:
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Common shares earned in accordance with the plan are calculated on an annual basis. Shares earned pursuant to the Trustee Compensation Plan are issued on or about July 15 for Trustees’ prior year of service. Non-independent Trustees are not compensated for their service on the Board or Committees.
Advisory Agreement
We are an externally managed trust and as such, although we have a Board of Trustees and Executive Officers responsible for our management, we have 0 paid employees. The following is a brief description of the current fees and compensation that may be and was received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 24, 2021,23, 2022 and is effective until March 31, 2022. 2023.
Management Fee: 0.35% ofThe below table summarizes the fees incurred to our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.Advisor.
| | | | | | |
| | Three Months ended March 31, | ||||
| | 2022 | | 2021 | ||
| | (in thousands) | ||||
Fee: | | | | | | |
Advisory | | $ | 898 | | $ | 807 |
Acquisition | | $ | 358 | | $ | 302 |
Disposition | | $ | 66 | | $ | - |
Financing | | $ | 32 | | $ | 43 |
Project Management | | $ | 206 | | $ | 71 |
Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us,
The below table summarizes 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 transactionpayable to be commercially competitive, fair and reasonable to us.our Advisor.
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.
Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility. The finance fee shall be capped at $38 per loan, refinance, line of credit or other credit facility.
Project Management Fee: 6% of all completed capital improvement projects on real estate investments owned by the Trust are paid to the Advisor.
| | | | | | |
| | Payable at | ||||
| | March 31, | | December 31, | ||
| | 2022 | | 2021 | ||
| | (in thousands) | ||||
Fee: | | | | | | |
Advisory | | $ | 303 | | $ | 296 |
Financing | | $ | - | | $ | 38 |
Development | | $ | - | | $ | 79 |
Project Management | | $ | 105 | | $ | 98 |
2822
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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.
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If Advisor shares responsibility for providing Development Services with one or more third parties, Advisor’s set Development Fee shall be reduced by the fees charged by any such third parties; provided, such adjustment is subject to a 2.5% minimum Advisor’s Development Fee. Additionally, in cases where the Advisor is sharing responsibility for providing Development Services, the Development Fee shall be capped at 2.5% of $20,000,000 ($500,000).
The below table summarizes the fees incurred and payable to our Advisor.
| | | | | | | | | | | | |
| | March 31, 2021 | | March 31, 2020 | | March 31, 2021 | | December 31, 2020 | ||||
| | Incurred | | Incurred | | Due and | | Due and | ||||
| | Fee | | Fee | | Payable | | Payable | ||||
| | (in thousands) | ||||||||||
Fee: | | | | | | | | | | | | |
Advisory | | $ | 807 | | $ | 765 | | $ | 271 | | $ | 278 |
Acquisition | | $ | - | | $ | 302 | | $ | - | | $ | - |
Disposition | | $ | - | | $ | 92 | | $ | - | | $ | 175 |
Financing | | $ | 43 | | $ | 25 | | $ | 38 | | $ | - |
Development | | $ | - | | $ | - | | $ | 79 | | $ | 79 |
Project Management | | $ | 71 | | $ | 17 | | $ | - | | $ | 51 |
Operating Partnership Units Issued in Connection with Acquisitions
During the three months ended March 31, 2021, there were 0 operating partnership units issued.
During the three months ended March 31, 2020, 176,000 operating partnership2022, 443,000 Operating Partnership units were issued to an entity affiliated with Messrs. Regan and Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $3,373.$10,180.
During the three months ended March 31, 2021, there were 0 Operating Partnership units issued.
Commissions
During the three months ended March 31, 20212022 and 2020,2021, we incurred real estate commissions of $244 and $250, and $324,respectively, to GOLDMARK Commercial Real Estate, Services, Inc., in which is controlled by Messrs. Regan and Wieland.Wieland jointly own a controlling interest. As of March 31, 2022 and December 31, 2021, there were 0 unpaid commissions to GOLDMARK Commercial Real Estate.
During the three months ended March 31, 2022, we incurred real estate commissions of $163, to GOLDMARK Property Management. There were 0 commissions paid to GOLDMARK Property Management for the three months ended March 31, 2021. As of March 31, 2022 and December 31, 2021, there were 0 unpaid commissions to GOLDMARK Commercial Real Estate.
Rental Income
During the three months ended March 31, 2022 and 2021, we received rental income of $66 and $67, respectively, under an operating lease agreement with GOLDMARK Property Management, Inc.
During the three months ended March 31, 2022, we received 0 rental income from GOLDMARK Commercial Real Estate. During the three months ended March 31, 2021 we received rental income of $14, under an operating lease agreement with GOLDMARK Commercial Real Estate, Inc.
During the three months ended March 31, 2022 and 2021, we received rental income of $32 and $21, respectively, under operating lease agreements with our Advisor.
During the three months ended March 31, 2022 and 2021, we received rental income of $209 and $122, respectively, under an operating lease agreement with Bell Bank.
Other operational activity
During the three months ended March 31, 2022 and 2021, the Trust incurred $206 and $174, 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 March 31, 2022 and December 31, 2021, operational outstanding commissions owedliabilities were $189 and $128, respectively.
Debt Financing
At March 31, 2022 and December 31, 2021, the Trust had $65,802 and $66,365, respectively, of outstanding principal on loans entered into with Bell Bank. During the three months ended March 31, 2022 and 2021, the Trust incurred interest expense on debt held with Bell Bank of $618 and $587, respectively. Accrued interest as of March 31, 2021 or2022 and December 31, 2020.
2021, related to this debt was $146 and $148, respectively.
2923
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Rental IncomeDevelopment Arrangements
During the three months ended March 31, 2022, the Trust incurred $153 in development fees to Trumont Group. NaN such fees were paid during the three months ended March 31, 2021. At March 31, 2022 and December 31, 2021, and 2020, we received rental income of $67 and $67, respectively, under an operating lease agreement with GOLDMARK Property Management, Inc.the Trust owed $51 for development fees to Trumont Group.
During the three months ended March 31, 2022, the Trust incurred $96 in construction fees to Trumont Construction. NaN such fees were paid during the three months ended March 31, 2021. At March 31, 2022 and December 31, 2021, the Trust owed $74 and 2020, we received rental income of $14 and $14,$29, respectively under an operating lease agreement with GOLDMARK Commercial Real Estate, Inc.for construction fees to Trumont Construction.
During the three months ended March 31, 2021 and 2020, we received rental income of $22 and $21, respectively, under operating lease agreements with our Advisor.
During2022, the Trust incurred $118 in general construction costs to Trumont Construction. NaN such fees were paid during the three months ended March 31, 2021. At March 31, 2022, the Trust owed $42 for general construction costs. At December 31, 2021, and 2020, we received rental income of $122 and $120, respectively, under an operating lease agreement with Bell Bank.0 general construction costs were owed to Trumont Construction.
Other operational liabilities and receivables
During the three months ended March 31, 2021 and 2020, the Trust incurred $174 and $0, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. As of March 31, 2021 and December 31, 2020, operational outstanding liabilities were $121 and $684, respectively.
Debt Financing
As of March 31, 2021 and December 31, 2020, the Trust had $67,935 and $51,915, respectively, of outstanding principal on loans entered into with Bell Bank. During the three months ended March 31, 2021 and 2020, the Trust incurred interest expense on debt held with Bell Bank of $587 and $514, respectively. Accrued interest as of March 31, 2021 and December 31, 2020, related to this debt was $123 and $121, respectively.
Insurance Services
On November 1, 2020, the Trust obtained a traditional insurance policy with Bell Insurance. The policy provides coverage for the Trust’s Commercial segment. As of March 31, 2021, total premiums paid for this policy was $113. There was 0 such policy in place with Bell Bank as of March 31, 2020.
NOTE 1713 - 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.
30
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Risk of Uninsured Property Losses
We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornadoes, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.
Litigation
The Trust is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Trust.
Significant Risks and Uncertainties
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. Several uncertainties continue to exist at this time, including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the recent surge in COVID-19 cases in many states. The Trust did not incur significant disruptions for the year ended December 31, 2020 from the COVID-19 pandemic. During the quarter ended March 31, 2021, the Trust continued to monitor state and federal legislative actions and efforts regarding the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen several tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that the COVID-19 pandemic and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.
NOTE 18 – DISPOSITIONS
During the three months ended March 31, 2021, the operating partnership did not dispose of any properties. During the three months ended March 31, 2020, the Trust disposed of 1 property located in Apple Valley, Minnesota, for $3,670 and recognized a gain of $1,455 in March 2020.
The Trust had 1 property that qualified for held for sale accounting treatment and as such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of March 31, 2021 and December 31, 2020.
3124
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20212022 and 20202021 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The following table shows the net book value of assets held for sale.NOTE 14 – DISPOSITIONS
| | | | | | |
| | March 31, | | December 31, | ||
| | 2021 |
| 2020 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Real estate investments | | | | | | |
Land and land improvements | | $ | 150 | | $ | 150 |
Building and improvements | | | 1,428 | | | 1,428 |
Real estate investments | | | 1,578 | | | 1,578 |
Less accumulated depreciation | | | (749) | | | (749) |
Real estate investments, net | | | 829 | | | 829 |
Other assets, net | | | 1 | | | 2 |
| | | | | | |
Total Assets | | $ | 830 | | $ | 831 |
| | | | | | |
LIABILITIES | | | | | | |
Tenant security deposits payable | | $ | 5 | | $ | 5 |
Accrued expenses and other liabilities | | $ | 12 | | $ | — |
| | | | | | |
Total Liabilities | | $ | 17 | | $ | 5 |
During the year ended March 31, 2022, the Trust disposed of 1 property located in Savage, Minnesota, for $2,700 and recognized a gain of $1,329. During the year ended March 31, 2021, the Operating Partnership did not dispose of any properties.
NOTE 1915 – ACQUISITIONS
The Trust had 0 acquisitions1 acquisition during the three months ended March 31, 2021.2022.
The Company closed on the following acquisitions during the three months ended March 31, 2020.
| | | | | | | | | | | | | |
Date | | Property Name | | Location | | Property Type | | | Units/ Square Footage/ Acres | | | Acquisition Price | |
| | | | | | | | | | | | | |
1/12/20 | | Wolf Creek | | Fargo, ND | | Apartment complex | | | 54 units | | $ | 4,968 | |
1/31/20 | | Columbia Park Village | | Grand Forks, ND | | Apartment complex | | | 12 units | | | 612 | |
3/1/20 | | Belmont East & West | | Bismarck, ND | | Apartment complex | | | 26 units | | | 1,494 | |
3/1/20 | | Eastbrook | | Bismarck, ND | | Apartment complex | | | 24 units | | | 1,296 | |
3/1/20 | | Hawn | | Fargo, ND | | Apartment complex | | | 48 units | | | 2,400 | |
3/1/20 | | Rosser | | Bismarck, ND | | Apartment complex | | | 24 units | | | 1,296 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 12,066 | (a) |
| | | | | | | | | | | | | |
Date | | Property Name | | Location | | Property Type | | | Units/ Square Footage/ Acres | | | Total Acquisition Cost | |
| | | | | | | | | | | | | |
2/28/22 | | Deer Park | | Hutchinson, MN | | Apartment Complex | | | 138 units | | $ | 15,073 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 15,073 | |
| | | | | | | | | | | | | |
Total consideration given for acquisitions through March 31, 20202022 was completed through issuing approximately 469,000443,000 limited partnership units of the operating partnershipOperating Partnership valued at $19.25$23 per unit for an aggregate consideration of approximately $9,031, assumed liabilities of $265, a mortgage $3,225$10,180, and cash of $375.$4,893. 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.
32
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021 and 2020 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The following table summarizes the acquisition date fair values, before pro-rations, the Company recorded in conjunction with the acquisitions discussed above:
| | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Three months ended | |||||||||
| | | March 31, | | | March 31, | |||||||||
| | | 2021 | | 2020 | | | | 2022 | | 2021 | ||||
| | | | | | | | | | | (in thousands) | ||||
Land, building, tenant improvements and FF&E | | | $ | - | | $ | 12,896 | | |||||||
Real estate investment acquired | | | $ | 14,831 | | $ | - | ||||||||
Acquired lease intangible assets | | | | 260 | | | - | ||||||||
Assumed Assets | | | | 2 | | | - | ||||||||
Total Assets Acquired | | | $ | 15,093 | | $ | - | ||||||||
Other liabilities | | | | - | | | (265) | | | | | (20) | | | - |
Net assets acquired | | | | - | | | 12,631 | | | | | 15,073 | | | - |
Equity/limited partnership unit consideration | | | | - | | | (9,031) | | | | | (10,180) | | | - |
New loans | | | | - | | | (3,225) | | |||||||
| | | | | | | | | |||||||
Net cash consideration | | | $ | - | | $ | 375 | | | | $ | 4,893 | | $ | - |
| | | | | | | | |
NOTE 2016 - SUBSEQUENT EVENTS
On April 15, 2021,2022, we paid a dividend or distribution of $0.265$0.2875 per share on our common shares of beneficial interest or limited partnership units, respectively, to common shareholders and limited partnership unit holders of record on March 31, 2021.2022.
On April 28, 2021,May 2, 2022, the Trust disposedreceived proceeds of $2,013, related to a commercial real estate property located in Waite Park, Minnesota for $900.note receivable that was outstanding at March 31, 2022.
Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.
We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.
3325
All dollar amounts in this Form 10-Q in Part I Items 2. through 4. and Part II Items 2. are stated in thousands with the exception of share and per share amounts, unless otherwise indicated.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our businessPlease see “Note Regarding Forward-Looking Statements” 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.“Risk Factors” for more information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.
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 179182 properties containing 10,32810,926 apartment units and approximately 1,642,0001,607,000 square feet of leasable commercial space as of March 31, 20212022. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $682,890,$727,279, which includes construction in progress. Currently Sterling’s current acquisition strategy and focus is solely on multifamily apartment properties. Substantially all of our business is conducted through our Operating Partnership, of which we are the sole general partner. The Trust controls the operating partnership as the general partner and owns approximately 35.35% of the operating partnership as of March 31, 2021. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, the proportionate shares of the assets and income of the operating partnership are deemed to be the assets and income of the Trust. Subject to certain restrictions and limitations, our business is externally managed by our advisor pursuant to an advisory agreement, Sterling Management, LLC manages our operations and our portfolio of real estate properties. Sterling Management, LLC also provides portfolio-management, marketing, investor-relations and other administrative services on our behalf. We have no paid employees.
34
Critical Accounting Estimates
Below isare accounting policies and estimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report. Certain accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see note 2 to the unaudited consolidated financial statements). These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.
Impairment of Real Estate Investments
The Trust’s investment properties are reviewedTrust will review each property within its portfolio, every quarter for potential impairment atthrough various screening mechanisms (identifiers) to determine if there are indicators of impairment on a property. If so, the endproperty is further analyzed through an undiscounted cash flow test. An identifier is not an indicator or triggering event for impairment; however, it is a mechanism to highlight an item on a property, which warrants further consideration and analysis to determine if an indicator is present. The following are examples of each reporting period whenever events or changes in circumstances indicateactivities 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:review quarterly:
If the presence of one or more impairment indicators as described aboveidentifier is identifiednoted through a screening mechanism 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 valuefurther analyzed to determine if an indicator of impairment exists. If further analysis does not explain the estimated futureproperties performance, the Trust considers this to
26
provide evidence that an indicator of impairment does exist, the property is then subject to additional impairment analysis, and an undiscounted cash flows. An investment propertyflow analysis is considered to be impaired whenperformed on the estimated future undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair valueindividual property. Indicators of an impaired investment property, the Trust makes complex or subjective assumptions which include, but are not limited to:impairment include:
Additionally, Sterling considers certain occurrences at a property to be a triggering event, causing an analysis of impairment to occur, and an undiscounted cash flow analysis is performed. Triggering Events of impairment include:
● | Continued difficulty in leasing property |
Significant decrease in market prices not in line with general market trends. |
◾ | Property make-up of units is not in line with market trends. |
◾ | Demographics of property. |
● | A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition. |
● | A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator. |
● | A current expectation that, “more likely than not,” a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent. As such, any property |
To the extent impairment has occurred, the Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. Based on evaluation, there were no impairment losses during the three months ended March 31, 20212022 and 2020.2021.
There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the three monthsyear ended March 31, 20212022 included elsewhere in this report.
Acquisition of Real Estate Investments
The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing, and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
REIT Status
We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes at least 90% of its REIT taxable income, excluding net capital gains, as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to distribute to our shareholders 100% of our taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result.
3527
Principal Business Activity
Sterling Real Estate Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code. Sterling currently directly owns directly and indirectly 179182 properties. The Trust’s 133138 residential properties are located in North Dakota, Minnesota, Missouri, and Nebraska and are principally multifamily apartment buildings. The Trust owns 4644 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, theThe Trust’s mix of properties is 76.9%76.1% residential and 23.1%23.9% commercial (based on cost) andwith a total $682,890 in real estate investmentscarrying value of $727,279 at March 31, 2021. The Trust has one property held for sale located in Waite Park, Minnesota at March 31, 2021. The carrying value of assets held for sale at March 31, 2021 is $830.2022. Currently our focus is limited to multifamily apartment properties. We currently have no plans with respect to our commercial properties. We will consider unsolicited offers for purchase of commercial properties on a case by casecase-by-case basis.
| | | | | | |
Residential Property |
| Location |
| No. of Properties |
| Units |
| | North Dakota | | 112 | | 6,378 |
| | Minnesota | | 16 | | 3,147 |
| | Missouri | | 1 | | 164 |
| | Nebraska | | 4 | | 639 |
| | | | 133 | | 10,328 |
| | | | | | |
Commercial Property |
| Location |
| No. of Properties |
| Sq. Ft |
| | North Dakota | | 20 | | 772,000 |
| | Arkansas | | 2 | | 28,000 |
| | Colorado | | 1 | | 17,000 |
| | Iowa | | 1 | | 33,000 |
| | Louisiana | | 1 | | 15,000 |
| | Michigan | | 1 | | 12,000 |
| | Minnesota | | 13 | | 668,000 |
| | Mississippi | | 1 | | 15,000 |
| | Nebraska | | 1 | | 19,000 |
| | Wisconsin | | 5 | | 63,000 |
| | | | 46 | | 1,642,000 |
The following table represents the number of properties the Trust owns in each state as of March 31, 2022.
| | | | | | |
Residential Property |
| Location |
| No. of Properties |
| Units |
| | North Dakota | | 117 | | 6,958 |
| | Minnesota | | 16 | | 3,169 |
| | Missouri | | 1 | | 164 |
| | Nebraska | | 4 | | 639 |
| | | | 138 | | 10,930 |
| | | | | | |
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 | | 11 | | 633,000 |
| | Mississippi | | 1 | | 15,000 |
| | Nebraska | | 1 | | 19,000 |
| | Wisconsin | | 5 | | 63,000 |
| | | | 44 | | 1,607,000 |
Results of Operations
Management Highlights
● | Increased |
● |
● | Disposed of one commercial property during the |
● | Declared and paid dividends aggregating |
3628
Results of Operations for the Three Months Ended March 31, 20212022 and 20202021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2021 |
| Three months ended March 31, 2020 | | Three months ended March 31, 2022 |
| Three months ended March 31, 2021 | ||||||||||||||||||||||||||||
|
| 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 |
| $ | 25,959 |
| $ | 5,801 |
| $ | 31,760 |
| $ | 23,995 |
| $ | 5,911 |
| $ | 29,906 |
| $ | 27,494 |
| $ | 5,422 |
| $ | 32,916 |
| $ | 25,959 |
| $ | 5,801 |
| $ | 31,760 |
Real Estate Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real Estate Taxes | | | 2,579 | | | 665 | | | 3,244 | | | 2,476 | | | 688 | | | 3,164 | | | 2,846 | | | 651 | | | 3,497 | | | 2,579 | | | 665 | | | 3,244 |
Property Management | | | 3,092 | | | 188 | | | 3,280 | | | 3,305 | | | 249 | | | 3,554 | | | 3,443 | | | 203 | | | 3,646 | | | 3,092 | | | 188 | | | 3,280 |
Utilities | | | 2,584 | | | 240 | | | 2,824 | | | 2,419 | | | 304 | | | 2,723 | | | 3,409 | | | 360 | | | 3,769 | | | 2,584 | | | 240 | | | 2,824 |
Repairs and Maintenance | | | 4,829 | | | 382 | | | 5,211 | | | 4,889 | | | 507 | | | 5,396 | | | 5,974 | | | 433 | | | 6,407 | | | 4,829 | | | 382 | | | 5,211 |
Insurance | | | 763 | | | 29 | | | 792 | | | 823 | | | 39 | | | 862 | | | 836 | | | 31 | | | 867 | | | 763 | | | 29 | | | 792 |
Total Real Estate Expenses | | | 13,847 | | | 1,504 | | | 15,351 | | | 13,912 | | | 1,787 | | | 15,699 | | | 16,508 | | | 1,678 | | | 18,186 | | | 13,847 | | | 1,504 | | | 15,351 |
Net Operating Income | | $ | 12,112 | | $ | 4,297 | | | 16,409 | | $ | 10,083 | | $ | 4,124 | | | 14,207 | | $ | 10,986 | | $ | 3,744 | | | 14,730 | | $ | 12,112 | | $ | 4,297 | | | 16,409 |
Interest | | | | | | | | | 4,287 | | | | | | | | | 4,350 | | | | | | | | | 4,845 | | | | | | | | | 4,287 |
Depreciation and amortization | | | | | | | | | 5,328 | | | | | | | | | 5,252 | | | | | | | | | 5,782 | | | | | | | | | 5,328 |
Administration of REIT | | | | | | | | | 1,201 | | | | | | | | | 1,162 | | | | | | | | | 1,217 | | | | | | | | | 1,201 |
Other income | | | | | | | | | (243) | | | | | | | | | (1,784) | | | | | | | | | (503) | | | | | | | | | (243) |
Net Income | | | | | | | | $ | 5,836 | | | | | | | | $ | 5,227 | | | | | | | | $ | 3,389 | | | | | | | | $ | 5,836 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income Attributed to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noncontrolling Interest | | | | | | | | $ | 3,784 | | | | | | | | $ | 3,414 | | | | | | | | $ | 2,175 | | | | | | | | $ | 3,784 |
Sterling Real Estate Trust | | | | | | | | $ | 2,052 | | | | | | | | $ | 1,813 | | | | | | | | $ | 1,214 | | | | | | | | $ | 2,052 |
Dividends per share (1) | | | | | | | | $ | 0.2650 | | | | | | | | $ | 0.2647 | | | | | | | | $ | 0.2875 | | | | | | | | $ | 0.2650 |
Earnings per share | | | | | | | | $ | 0.2100 | | | | | | | | $ | 0.1900 | | | | | | | | $ | 0.1200 | | | | | | | | $ | 0.2100 |
Weighted average number of common shares | | | | | | | | | 9,983 | | | | | | | | | 9,562 | | | | | | | | | 10,465 | | | | | | | | | 9,983 |
(1) | Does not take into consideration the amounts distributed by the |
Revenues
Property revenues of $31,760$32,916 for the three months ended March 31, 20212022 increased $1,854$1,156 or 6.2%3.6% in comparison to the same period in 2020.2021. Residential property revenues increased $1,964$1,535 and commercial property revenues decreased $110.$379.
The following table illustrates changes in occupancy for the three monththree-month periods indicated:
| | | | | |
|
| March 31, | | March 31, | |
|
| 2021 | | 2020 | |
Residential occupancy | | 94.7 | % | 92.8 | % |
Commercial occupancy | | 91.9 | % | 90.0 | % |
| | | | | |
|
| March 31, | | March 31, | |
|
| 2022 | | 2021 | |
Residential occupancy | | 94.1 | % | 94.7 | % |
Commercial occupancy | | 74.8 | % | 91.9 | % |
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Residential revenues for the three months ended March 31, 20212022 increased $1,964$1,535 or 5.9% in comparison to the same period for 2020.2021. Residential properties acquired since January 1, 20202021 contributed approximately $1,072$1,444 to the increase in total residential revenues for the three months ended March 31, 2021.2022. The remaining increase is due to increased rent charges at our stabilized properties as well as decreased vacancy inproperties. Residential revenues comprised 83.5% of total revenues for the Fargo market.three months ended March 31, 2022 compared to 81.7% of total revenues for the three months ended March 31, 2021. The residential occupancy rates for the three months ended March 31, 2021 increased 1.9%2022 decreased 0.6% primarily due to decreased vacancy, caused by rent proceeds received on delinquent charges.increased vacancy.
For the three months ended March 31, 2021,2022, total commercial revenues decreased $110$379 or 6.5% in comparison to the same period for 2020.2021. The decrease was primarily attributableattributed to the saledisposition of three commercial real estate investments in 2020.2022 and 2021. These properties account for $324$234 of decreased commercial rent during the three months ended March 31, 2021. The overall2022. Increased vacancy in the Minneapolis market accounts for $325 of decreased commercial income decrease was offset due to straight line rental income from new leases entered into at commercial properties located in Fargo, ND and Minneapolis, MN.revenue. The commercial occupancy rates for the three monthsyear ended March 31, 2021 increased 1.9%2022 decreased 17.1% primarily due to new leases entered intooffice spaces located in the Fargo, NDMinnesota market.
Expenses
Residential expenses from operations of $13,847$16,508 during the three months ended March 31, 2021 decreased $652022 increased $2,661 or 0.5%19.2% in comparison to the same period in 2020.2021. The decrease wasincrease is attributed to a reductionan increase in property management fees, on-site staff costsrepairs and other miscellaneous expensesmaintenance expense of $221$1,145 or 6.7%23.7%. Property management fees approximate 5% of net collected rent. This decrease is offset by increased real estate taxes of $103 or 4.2%. The main reason forProperties acquired since January 1, 2021 attributed $266 to the increase in real estate taxes is relatedrepairs and maintenance expense. Additionally, increased project and upgrade costs, which are considered to residential property acquisitions duringbe deferred maintenance costs from the year ended December 31, 2020, which accounts for $60 ofdue to COVID-19 restrictions attribute to the increase. Further, the decrease was offset by increased utilities expense of $165 or 6.8%, driven by an increase in waterrepairs and sewermaintenance expense during the three months ended March 31, 2021.2022. The increase is also attributed to an increase in utility expense of $825 or 31.9% as well as an increase in property management expense of $351 or 11.4%. The main reason for the increases in utility and property management expenses is related to the properties acquired since January 1, 2021, which account for $196 and $187 of the increase, respectively.
Commercial expenses from operations of $1,504$1,678 during the three months ended March 31, 2021 decreased $2832022 increased $174 or 15.8%11.6% in comparison to the same period in 2020.2021. The decreaseincrease in overall expenses is attributed to a decreasean increase in repairs and maintenanceutility expense of $125$120 or 24.7% with snow removal accounting for $31 or 24.8% of the decrease. Utility50.0%. Repair and maintenance expenses during the three months ended March 31, 2021 decreased2022 increased by $64$51 or 21.1%13.4% in comparison to the same period 2020,2021, also contributed to the overall decrease. increase.
Interest expense of $4,287$4,845 during the three months ended March 31, 2021 decreased $632022 increased $558 or 1.4%13.0% in comparison to the same period in 2020. Pay offs of higher interest rate loans2021. Interest expense related to financing activities increased by $451 during 2020, decreased the overall weighted average interest rate on our consolidated mortgage debt bythree months ended March 31, basis points. The lower consolidated mortgage rate decreased total interest paid on mortgages by $852022 as compared to the same period in 2020, bringing2021. The Trust continued to take advantage of the low interest rate environment throughout 2021 and into the first quarter of 2022 as we refinanced high-rate loans for new, lower rate mortgages while also financing new mortgage debt to raise capital. Though the overall debt and interest expense increased, the refinances and additional financing completed, improved the Trust’s weighted average interest rate by 19 basis points to 3.79% at March 31, 2022, as a percentage of incomecompared to 13.5% versus 14.5% in 2020. Additionally,3.98% at March 31, 2021. Capitalized interest expense onrelated to construction in progress offsetincreased $70 during the decrease in interest expense. Interest expense for construction in progress is classified as a contra-expense account, offsettingthree months ended March 31, 2022. During the three months ended March 31, 2022, interest expense and resulting in an increasewas 14.7% of $37 in interest expense.total revenues.
Depreciation and amortization expense of $5,328$5,782 during the three months ended March 31, 2022 increased $454 or 8.5%. Properties acquired since January 1, 2021, increased $76 or 1.4%. The increase is primarily duecontributed approximately $359 to the property acquisitions that occurredincrease in 2020.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 monthsyear ended March 31, 20212022 and 2020 was2021was 17.6% and 16.8% and 17.6%, respectively.
REIT administration expenses of $1,201$1,217 during the three months ended March 31, 20212022 increased $39$16 or 3.4%1.3% compared to the same period in 2020.2021. The increase is attributable to an increase in the amount of the REIT advisory fee.
Other income of $243$503 for the three months ended March 31, 2021 decreased $1,5412022 increased $260 or 86.4%107.0% in comparison to the same period in 2020.2021. The decreaseincrease is attributed to disposition activity in the first quarter of 2020 that did not occur in the same period in 2021. The total gainrealized gains on the sale of a real estate investment during the three months ended March 31, 2020 was $1,455.investments of $1,329 as compared to 2021. The increase is offset by a decrease in equity in affiliates of $1,141, caused by depreciation expense related to two developments being put into service.
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Net Operating Income
We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders of the Trust or cash flow from operating activities as a measure of financial performance. See Note 3 to the Consolidated Financial Statements included herein, as well as the above table for more information on NOI performance by segment.
Net Income
Net income for the three months ended March 31, 2021was $5,836 compared to $5,227 for the three months ended March 31, 2020.
Known Trends, Events and Uncertainties
COVID-19 Impact
The Trust continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. A number of uncertainties continue to exist at this time including but not limited to the uncertainty of additional state and/or federal stimulus and the effect of the surge in COVID-19 cases in many states. While the Trust did not incur significant disruptions during the year ended December 31, 2020 from the COVID-19 pandemic, the effects of the ongoing COVID-19 pandemic could have material adverse effects on our business and results of operations so long as COVID-19 continues to impact the U.S. economy. The extent to which the economic disruption associated with the COVID-19 pandemic impacts our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. In particular, during the three months ended March 31, 2021, the Trust continued to monitor state and federal legislative actions and efforts in regard to the eviction moratorium which affects almost all single-family and multifamily rental housing units. The Trust has seen a number of tenants complete the sworn statement certifying the qualifications to obtain eviction protection. The Trust is monitoring the collection rates on these tenants and, at this time is unable to predict the impact that COVID-19 and the eviction moratorium will have on its future financial condition, results of operations and cash flows due to numerous uncertainties.
As of March 31, 2021, the Trust received certain rent relief requests as a result of COVID-19. These requests were received principally from office tenants and most often in the form of rent deferral requests. Few rental defaults have occurred to date and the Trust is pursuing legal remedies as to these amounts which are not material in the aggregate. The Trust will continue to evaluate any further tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor will the Trust forgo its contractual rights under its lease agreements.
Property Acquisitions and Dispositions
Property Acquisitions and Dispositions during the three months ended March 31, 2021
There were no acquisitions or dispositions during the three months ended March 31, 2021.
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Property Acquisitions and Dispositions during the three months ended March 31, 2020
We acquired six properties for a total of $12,896 during the three months ended March 31, 2020. Total consideration for the acquisitions was the issuance of approximately $9,031 in limited partnership units of the operating partnership, assumed liabilities of $265, cash of $375 and a mortgage of $3,225.
We disposed of one retail property located in Apple Valley, MN for $3,670.
See Notes 18 and 19 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the three months ended March 31, 2021 and 2020.
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 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 March 31, 20212022, consists primarily of construction at Bell Plazaresidential properties located in Minneapolis, Minnesota, the Montreal Courts Apartments located in Little Canada, Minnesota, the Bayview ApartmentsNorth Dakota and Minnesota. Prairiewood Meadows located in Fargo, North Dakota consists of the re-development of one building due to a fire, a water main break, a new club house for residents, parking lot additions and Trustmarkrepairs and replacement of windows and patio doors on the other two buildings. The re-development of one building is substantially complete with current expectations to be completed in the early second quarter of 2022. The parking lot and clubhouse will remain in construction phase throughout the second and third quarter of 2022. The current budget for this property is $3,884 of which $2,622 has been incurred and accrued for in construction in progress. Parkwest Gardens located in Fargo, North Dakota. The Bell Plaza work includes updated HVACDakota is adding a club house for residents through the second and thermostats throughoutthird quarter of 2022. As of March 31, 2022, the building. Current expectations are thatproperty was still in the design phase of the project willwhere budgeted for this property to date is $470 of which $25 has incurred in construction in progress. Maplewood Apartments located in Maplewood, Minnesota consists of parking lot repairs and reconstruction of one building due to a fire affecting multiple units and common areas. The current budget for this property is $577 of which $458 of which has incurred. Both improvements are expected to be completed in the second quarter of 2021 and the current project budget approximates $1,000 of which $998 has been incurred and included in construction in progress. The Montreal Courts development consists of a new clubhouse. The current project budget approximates $1,965 of which $1,827 has been incurred and the remaining budgeted cost is accrued for at March 31, 2021. The project is included in construction in progress until final payment of all costs have been made which is expected to occur during the second quarter of 2021. The Bayview Apartments development consists of new windows and siding. Current expectations are that the project will be completed in the second quarter of 2021 and the current project budget approximates $1,501 of which $1,418 has been incurred and is included in construction in progress. The Trustmark construction primarily consists of office demolition and clearing, as well as tenant space remodel and build-outs. Current expectations are that the projects will be completed in the second quarter of 2021 and the current project budgets approximate $5,398 of which $2,968 has been incurred and is included in construction in progress.2022 pending weather.
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
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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 needsneed or its ability to service indebtedness or to pay dividends to shareholders.
The following tables include calculations of FFO and the reconciliations to net income, forduring the three months ended March 31, 20212022 and 2020,2021, respectively. We believe these calculations are the most comparable GAAP financial measure:
Reconciliation of Net Income Attributable to Sterling to FFO Applicable to Common Shares and Limited Partnership Units
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2021 | | | Three months ended March 31, 2020 | |||||||||||
| | | | | Weighted Avg | | Per | | | | | Weighted Avg | | Per | ||
| | | | | Shares and | | Share and | | | | | Shares and | | Share and | ||
|
| Amount |
| Units(1) |
| Unit (2) |
| Amount |
| Units(1) |
| Unit (2) | ||||
| | (unaudited) | ||||||||||||||
| | (in thousands, except per share data) | ||||||||||||||
Net Income attributable to Sterling Real Estate Trust | | $ | 2,052 | | 9,983 | | $ | 0.21 | | $ | 1,813 | | 9,562 | | $ | 0.19 |
| | | | | | | | | | | | | | | | |
Add back: | | | | | | | | | | | | | | | | |
Noncontrolling Interest - OPU | | | 3,753 | | 18,260 | | | | | | 3,419 | | 18,036 | | | |
Depreciation & Amortization from continuing operations | | | 5,328 | | | | | | | | 5,252 | | | | | |
Pro rata share of unconsolidated affiliate depreciation & amortization | | | 140 | | | | | | | | 94 | | | | | |
Subtract: | | | | | | | | | | | | | | | | |
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments | | | — | | | | | | | | (1,455) | | | | | |
Funds from operations applicable to common shares and limited partnership units (FFO) | | $ | 11,273 | | 28,243 | | $ | 0.40 | | $ | 9,123 | | 27,598 | | $ | 0.33 |
| | | | | | | | | | |
| | Three months ended March 31, 2022 | | Three months ended March 31, 2021 | ||||||
| | | | | Weighted Avg | | | | | Weighted Avg |
| | | | | Shares and | | | | | Shares and |
|
| Amount |
| Units |
| Amount |
| Units | ||
| | (unaudited) | ||||||||
| | (in thousands) | ||||||||
Net Income attributable to Sterling Real Estate Trust | | $ | 1,214 | | 10,465 | | $ | 2,052 | | 9,983 |
| | | | | | | | | | |
Add back: | | | | | | | | | | |
Noncontrolling Interest - OPU | | | 2,145 | | 18,495 | | | 3,753 | | 18,260 |
Depreciation & Amortization from continuing operations | | | 5,782 | | | | | 5,328 | | |
Pro rata share of unconsolidated affiliate depreciation and amortization | | | 1,089 | | | | | 140 | | |
Subtract: | | | | | | | | | | |
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments | | | (1,329) | | | | | — | | |
Funds from operations applicable to common shares and limited partnership units (FFO) | | $ | 8,901 | | 28,960 | | $ | 11,273 | | 28,243 |
Liquidity and Capital Resources
Evaluation of Liquidity
Wecontinually evaluate our liquidity and ability to fund future operations, debt obligations, and any repurchase requests. As part of our analysis, we consider among other items, the credit quality of tenants, and current lease terms and projected expiration dates, as well as the effect of the COVID-19 pandemic on rental income proceeds.
Our principal demands for funds will be for thethe: (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions, (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption plans and (vi) capital improvements, development projects, and property related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests to our shareholders and the unit holders of our operating partnershipOperating Partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary. We expect to meet
At March 31, 2022, our unrestricted cash needsresources consisted of cash and cash equivalents totaling approximately $49,854. Our unrestricted cash reserves can be used for acquisitionsworking capital needs and other real-estate investments fromcommitments. In addition, we had unencumbered properties with a gross book value of $65,684, which could potentially be used as collateral to secure additional financing in future periods.
The Trust has 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 March 31, 2022, the Bremer lines of credit secured two letters of credit totaling $67, leaving $9,848 available and unused under the agreements. The Trust anticipates renewing the line of credit expiring in the next 12 months to continue to hold it as a cash flow from operations, net proceeds of share offerings and debt proceeds.resource to the Trust.
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EvaluationThe sale of Liquidityour securities and issuance of limited partnership units of the Operating Partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for the Trust.
We continually evaluateDuring the three months ended March 31, 2022, we did not sell any common shares in private placements. During the three months ended March 31, 2022, we issued 79,000 and 57,000 common shares under the dividend reinvestment plan and optional share purchases, respectively, which raised gross proceeds of $3,029. During the three months ended March 31, 2021, we did not sell any common shares in private placements. During the three months ended March 31, 2021, we issued 89,000 and 65,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively, which raised gross proceeds of $2,993.
Additionally, to reduce our cash investment and liquidity needs, the Trust utilizes the UPREIT structure whereby we can acquire property in whole or in part by issuing partnership units in lieu of cash payments. During the three months ended March 31, 2022, the Trust issued approximately 443,000 limited partnership units of the Operating Partnership valued at $23.00 per unit for an aggregate consideration of approximately $10,180 for the purchase of real estate investments. No limited partnership units of the Operating Partnership were issued in relation to the acquisition of real estate investments for the three months ended March 31, 2021.
The Board of Trustees, acting as general partner for the Operating Partnership, determined an estimate of fair value for the limited partnership units exchanged through the UPREIT structure. In determining this value, the Board relied upon their experience with, and abilityknowledge about, the Trust’s real estate portfolio and debt obligations. The Board typically determines the fair value on an annual basis. The Trustees determine the fair value, in their sole discretion and use data points to fundguide their determination which is typically based on a consensus of opinion. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future operations, debt obligationsUPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise.
As with any repurchase requests. As partvaluation 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 analysis,real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.
Cash on hand, together with cash from operations and access to the lines of credit, is expected to provide sufficient capital to meet the Company’s needs for at least the next 12 months and as appropriate, we consider among other items, credit qualitywill use cash flows from operations, net proceeds from share offerings, debt proceeds, and proceeds from the disposition of tenants and lease expirations.real estate investments to meet long term liquidity demands.
Credit Quality of Tenants
We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.
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To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenants’ operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our propertiesproperty’s performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.
Lease Expirations and Occupancy
Generally ourOur residential leases are for a term of one year or less. There are two commercial leases expiring within the next twelve months that are considered significant. As of March 31, 2021 and 2020, revenues of $327 and $321, respectively, were received from these leases. The Advisor, with the assistance of our property managers, actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where tenants elect not to renew, we may seek replacement tenants or try to sell the property.
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.
| | | | | | |
| | Three months ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Net cash flows provided by operating activities | | $ | 7,457 | | $ | 8,909 |
Net cash flows used in investing activities | | $ | (10,187) | | $ | (4,116) |
Net cash flows provided by (used in) financing activities | | $ | 3,567 | | $ | (2,081) |
Operating Activities
Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance cost, and real estate taxes. Additionally, we incur general and administrative expenses, advisory fees, acquisition and disposition expenses and financing fees.
Net cash provided by operating activities was $8,909$7,452 and $7,184$8,909 for the three monthsyear ended March 31, 20212022 and 2020,2021, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization.
Investing Activities
Our investing activities generally consist of real estate-related transactions (purchases and sales of properties) and payments of capitalized property-related costs such as intangible assets and reserve escrows.
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Net cash used in investing activities was $4,116$10,187 and $1,613$4,116 for the three months ended March 31, 20212022 and 2020,2021, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the three months ended March 31, 20212022 and 2020,2021, cash flows used in investing activities related to the acquisition of properties and capital expenditures was $3,686$7,295 and $5,433,$3,686, respectively. Cash outlays related to investments in unconsolidated affiliates was $2,090$6,444 and $38$2,090 during the three months ended March 31, 2022 and 2021, and 2020, respectively. GainsProceeds from involuntary conversions for the three months ended March 31, 2022 and 2021 was $1,642. Gains$261 and $1,642, respectively. Proceeds from sale of real estate investments during the three months ended March 31, 20202022 was $3,494.$2,622. During the three months ended March 31, 2021, there were no proceeds from the sale of real estate investments.
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Financing Activities
Our financing activities generally consist of funding property purchases by raising proceeds and securing mortgage notes payable as well as paying dividends, paying syndication costs, and making principal payments on mortgage notes payable.
Net cash provided by financing activities was $3,567 and used in financing activities was $2,081 and $7,260 for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, we paid $5,851 in dividends and 2020. Duringdistributions, redeemed $736 of shares and units, received proceeds of $12,867 from new mortgage notes, and made mortgage principal payments of $3,931. For the three months ended March 31, 2021, we paid $5,761 in dividends and distributions, redeemed $1,405 of shares and units, received proceeds of $18,485 from new mortgage notes, and made mortgage principal payments of $14,528. For the three months ended March 31, 2020, we paid $5,534 in dividends and distributions, redeemed $1,237 of shares and units, received proceeds of $7,788 from new mortgage notes, and made mortgage principal payments of $9,129.
Estimated Value of Units/Shares
The Board of Trustees determined an estimate of fair value for the trust shares in the first three months of 2021 and 2020. In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in the first three months of 2021 and 2020. In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations. The Board typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition.
The Board determined the fair value of the shares and limited partnership units to be $20.00 per share/unit effective January 1, 2021. The Board determined the fair value of the shares and limited partnership units to be $19.25 per share/unit effective January 1, 2020.
Determination of price is a matter within the Board’s sole discretion. The Trust does not determine price based on any rate formula or specific factors. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA’s specific pricing requirements set out in Rule 2340 or otherwise. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust’s Advisor.
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.
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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.
Dividends and Distributions
Common Stock
We declared cash dividends to our shareholders during the period from January 1, 2022 to March 31, 2022 totaling $3,007 or $0.2875 per share, of which $1,130 were cash dividends and $1,877 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $7,457 from our cash flows from operations.
We declared cash dividends to our shareholders during the period from January 1, 2021 to March 31, 2021 totaling $2,642 or $0.2650 per share, of which $963 were cash dividends and $1,679 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $8,909 from our cash flows from operations and $1 provided by distributions from unconsolidated affiliates.
We declared cash dividends to our shareholders during the period from January 1, 2020 to March 31, 2020 totaling $2,527 or $0.2647 per share, of which $919 were cash dividends and $1,608 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $7,184 from our cash flows from operations and $105 provided by distributions from unconsolidated affiliates.operations.
We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate cash and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.
The following table presents certain information regarding our dividend coverage:
| | | | | | | | | | | | |
| | Three Months Ended | | Three months ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Cash flows provided by operations (includes net income of $5,836 and $5,227, respectively) | | $ | 8,909 | | $ | 7,184 | ||||||
Cash flows provided by operations (includes net income of $3,389 and $5,836, respectively) | | $ | 7,457 | | $ | 8,909 | ||||||
Distributions in excess of earnings received from unconsolidated affiliates | |
| 1 | |
| 105 | |
| 105 | |
| 1 |
Gain (Loss) on sales of real estate and non-real estate investments | |
| — | |
| 1,455 | ||||||
Gain on sales of real estate and non-real estate investments | |
| 1,329 | |
| — | ||||||
Dividends declared | |
| (2,642) | |
| (2,527) | |
| (3,007) | |
| (2,642) |
Excess | | $ | 6,268 | | $ | 6,217 | | $ | 5,884 | | $ | 6,268 |
Limited Partnership Units
The operating partnershipOperating Partnership agreement provides that our operating partnershipOperating Partnership will distribute to the partners (subject to certain limitations) cash from operations on a quarterly basis (or more frequently, if we so elect) in accordance with the percentage interests of the partners. We determine the amounts of such distributions in our sole discretion.
For the three months ended March 31, 2022, we declared quarterly distributions totaling $5,359 to holders of limited partnership units in our Operating Partnership, which we paid on April 15, 2022. Distributions were paid at a rate of $0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
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For the three months ended March 31, 2021, we declared quarterly distributions totaling $4,835 to holders of limited partnership units in our operating partnership,Operating Partnership, which we paid on April 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 three months ended March 31, 2020, we declared quarterly distributions totaling $4,831 to holders of limited partnership units in our operating partnership, which we paid on April 15, 2020. Distributions were paid at a rate of $0.2647 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
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Sources of Dividends and Distributions
For the three months ended March 31, 2021, we paid2022, aggregate dividends and distributions of $7,447, which were paid$8,366, are funded with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was $11,273$8,901 for the three months ended March 31, 2021;2022; therefore, we believe our dividend and distribution policy is sustainable over time. For the three months ended March 31, 2020,2021, we paid aggregate dividends and distributions of $7,118, which were paid$7,477 with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was $9,123$11,273 as of the three months ended March 31, 2020.2021. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.
Cash Resources
At March 31, 2021, our cash resources consisted of cash and cash equivalents totaling approximately $13,888. Our cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of $51,314, which could potentially be used as collateral to secure additional financing in future periods.
At March 31, 2021, there was no balance outstanding on the lines of credit. Of the $28,215 available as of March 31, 2021, one variable rate line of credit secured two letters of credit totaling $746, leaving $27,469 available and unused under the agreements. See Note 7 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.
The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the three months ended March 31, 2021, we did not sell any common shares in a private placement. During the three months ended March 31, 2021, 89,000 common shares were issued pursuant to dividend reinvestments and 65,000 were issued pursuant to additional optional cash purchases under the plan, and raised gross proceeds of $2,993. During the three months ended March 31, 2020, we did not sell any common shares in a private placement. During the three months ended March 31, 2020, 87,000 common shares were issued pursuant to dividend reinvestments and 62,000 were issued pursuant to additional optional cash purchases under the plan, and raised gross proceeds of $2,787.
During the three months ended March 31, 2021, we issued no limited partnership units in connection with acquisition of properties.
During the three months ended March 31, 2020, we issued 469,000 limited partnership units in connection with six properties acquired.
Unconsolidated Affiliate ArrangementsRecentlyIssuedAccountingPronouncements
AsFor a discussion of March 31, 2021recently issued accounting pronouncements, see Note 2, Principal Activity and December 31, 2020, we had debt obligations relatedSignificant Accounting Policies— Recently Issued Accounting Pronouncements, to investments in unconsolidated affiliatesthe consolidated financial statements that are a part of $52,276 and $41,559, respectively. The Trust is jointly and severally liable for the full mortgage balance.this Annual Report on Form 10-Q.
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Item 3. Quantitative and QualitativeQualitative Disclosures about Market Risk
The Trust is exposed to certain risk arising from both its business operations and economic conditions and principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Trust manages economic risks, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities. The principal material financial market risk to which we are exposed, is interest-rate risk. Our exposurerisk, which the Trust manages through the use of derivative financial instruments. Specifically, the Trust enters into derivative financial instruments to market risk for changesmanage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates relates primarily to refinancing long-term fixed rate obligations,rates. During the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate lines of credit.
The carrying amount of ourthree months ended March 31, 2022, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. These swaps have been adjusted to their fair valuean aggregated notional amount of $108,061 at March 31, 2021, resulting2022. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in a liabilitythe event of $341 and assetnon-performance by the counterparty under the terms of $920. As of December 31, 2020, the fair value adjustment resulted in a liability of $1,805.agreement.
As much of March 31, 2022, we had one variable-rate mortgage debt outstanding of $5,183. Additionally, the Trust had $108,061 of variable-rate borrowings, with the total outstanding balance fixed through interest rate swaps. We estimate that an increase in 30-day LIBOR of 100 basis points with constant risk spreads would result in our outstanding debtnet income being reduced by approximately $52 on an annual basis. We estimate that a decrease in 30-day LIBOR of 100 basis points would increase the amount of net income by a similar amount. Even though our goal is long-term, fixed rate debt, ourto maintain a fairly low exposure to interest rate risk, has not changed significantly from what was disclosedwe may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 13, 2021. fixed or variable rate debt or future debt.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Sterling Real Estate Trust’sOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, havehas evaluated the effectiveness of Sterling Real Estate Trust’sour disclosure controls and procedures (as such term is defined in RulesRule 13a-15(e) and 15d-15(e)under the Securities Exchange Act of the Exchange Act)1934, as amended) as of the end of the period covered by this Report.report. Based on thatsuch evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer have concluded that, the Company’sas of March 31, 2022, such disclosure controls and procedures (as definedwere effective to ensure that information required to be disclosed by us in Rules 13a-15(e) and 15d-15(e) ofthe reports that we file or submit under the Exchange Act) were not effectiveAct 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 of December 31, 2020 dueappropriate to a material weakness in internal control over financial reporting.allow timely decisions regarding required disclosure.
Material Weakness in Internal Control over Financial Reporting
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At December 31, 2020, the Trust concluded its internal controls over financial reporting surrounding management’s reviewTable of the appropriate hedging documentation failed to identify the drafting error in the internal documentation relating to the method used to test the effectiveness of the Trust’s hedging relationships. In addition, the contemporaneous documentation and fair value hedge effectiveness requirements of ASC 815 were not applied appropriately for the hedging relationships at inceptionContents. The ineffectiveness of these internal controls did not result in a restatement of previously issued interim or annual consolidated financial statements.
As of March 31, 2021, the following remediation measures have been implemented:
We believe these remediation measures have strengthened our internal control over financial reporting and have remediated the material weakness identified as of December 31, 2020.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the first fiscal quarter of 20212022 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 1. Legal Proceedings.
From time to time we may be involved in disputes or litigation relating to claims arising out of our operations. We are not currently a party to any legal proceedings that could reasonably be expected to have a material adverse effect on our business, financial condition or results of operation.
Item 1A. Risk Factors.
There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the period ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sale of Securities
Neither Sterling nor the operating partnershipOperating Partnership issued any unregistered securities during the three months ended March 31, 2021.2022.
Other Sales
During the three months ended March 31, 2021,2022, we did not issuedissue any common shares in exchange for limited partnership units of the operating partnershipOperating 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 three months ended March 31, 2021:2022:
| | | | | | | | | | | | | | | |
| | | | | | | Average | | Total Number of | | Total Number of | | Approximate Dollar Value of | ||
| | Total Number | | | Total Number | | Price | | Shares Redeemed | | Units Redeemed | | Shares (or Units) that May | ||
| | of Common | | | of Limited | | Paid per | | as Part of | | as Part of | | Yet Be Redeemed Under | ||
| | Shares | | | Partner Units | | Common | | Publicly Announced | | Publicly Announced | | Publicly Announced | ||
Period |
| Redeemed | |
| Redeemed |
| Share/Unit |
| Plans or Programs |
| Plans or Programs |
| Plans or Programs | ||
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 | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | 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, 2022 | | 6,000 | | | 2,000 | | $ | 21.85 | | 1,456,000 | | 1,115,000 | | $ | 16,579 |
February 1-29, 2022 | | 5,000 | | | 1,000 | | $ | 21.85 | | 1,461,000 | | 1,116,000 | | $ | 16,424 |
March 1-31, 2022 | | 7,000 | | | 12,000 | | $ | 21.85 | | 1,468,000 | | 1,128,000 | | $ | 16,025 |
Total | | 18,000 | | | 15,000 | | | | | | | | | | |
For the three months ended March 31, 2021,2022, we redeemed all shares or units for which we received redemption requests. In addition, for the three months ended March 31, 2021,2022, 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 March 31, 2021,2022, was $5,920.$16,025. The redemption price for such shares and units redeemed under the plan was fixed at $19.00$21.85 per share or unit, which became effective January 1, 2021.2022. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications
37
network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend, or suspend the redemption plan at any time if it determines to do so is in our best interest.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| | |
Exhibit | | |
Number | | Title of Document |
| | |
10.1 | | |
|
|
|
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
101 | | The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, |
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:May 14, 202111, 2022
| STERLING REAL ESTATE TRUST | |
| | |
| By: | /s/ Kenneth P. Regan |
| | Kenneth P. Regan |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ |
| |
|
| | Chief Financial Officer |
| | (Principal Financial Officer) |
4940