UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~September 30, 2022~~March 31, 2023

☐ 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.)

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

(701) 353-2720

(Registrant’s telephone number, including area code)

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

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


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

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

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

Indicate by check mark whether the registrant is a ~~large accelerated~~large-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 ~~November 7, 2022~~May 8, 2023
Common Shares of Beneficial Interest, $0.01 par value per share		~~10,811,038~~11,043,189

Table of Contents

STERLING REAL ESTATE TRUST ~~AND SUBSIDIARIES~~

INDEX

	Page
	No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):	3
Consolidated Balance Sheets – as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	3
Consolidated Statements of Operations and Other Comprehensive (Loss) Income – Three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
Consolidated Statements of Shareholders’ Equity – Three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	5
Consolidated Statements of Cash Flows – ~~nine~~Three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	76
Notes to Consolidated Financial Statements	98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3027
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4237
Item 4. Controls and Procedures	4338

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4438
Item 6. Exhibits	4641
Signatures	4742

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of ~~September 30, 2022~~March 31, 2023 (UNAUDITED) and December 31, ~~2021~~2022

September 30,

December 31,

2022

2021

(in thousands)
ASSETS

Real estate investments

Land and land improvements

$
125,408

$
125,338
Building and improvements

789,974

763,003
Construction in progress

6,277

8,361
Real estate investments

921,659

896,702
Less accumulated depreciation

(191,016)

(179,155)
Real estate investments, net

730,643

717,547
Cash and cash equivalents

20,464

51,507
Restricted deposits

9,267

9,149
Investment in securities

42,062

—
Investment in unconsolidated affiliates

26,176

18,658
Notes receivable

7,749

7,457
Lease intangible assets, less accumulated amortization

5,556

6,246
Other assets, net

25,868

10,302

Total Assets

$
867,785

$
820,866

LIABILITIES

Mortgage notes payable, net

$
511,990

$
493,142
Dividends payable

8,451

7,567
Tenant security deposits payable

6,305

5,225
Lease intangible liabilities, less accumulated amortization

684

811
Accrued expenses and other liabilities

14,778

18,604
Total Liabilities

542,208

525,349

COMMITMENTS and CONTINGENCIES - Note 13

SHAREHOLDERS' EQUITY

Beneficial interest

122,821

116,856
Noncontrolling interest

Operating partnership

185,758

176,954
Partially owned properties

2,642

2,657
Accumulated other comprehensive income (loss)

14,356

(950)
Total Shareholders' Equity

325,577

295,517

$
867,785

$
820,866

~~See Notes to Consolidated Financial Statements~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE~~ ~~INCOME~~

~~FOR THE THREE AND NINE MONTHS ENDED~~ ~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021

(in thousands, except per share data)

(in thousands, except per share data)
Income from rental operations

Real estate rental income
$
34,531

$
33,053

$
101,264

$
96,736
Expenses

Expenses from rental operations

Operating expenses

14,363

14,184

42,209

37,956
Real estate taxes

3,565

3,489

10,700

10,123
Depreciation and amortization

6,120

5,551

17,865

16,634
Interest

5,081

4,671

14,882

13,261

29,129

27,895

85,656

77,974
Administration of REIT

1,471

1,007

4,087

3,267
Total expenses

30,600

28,902

89,743

81,241
Income from operations

3,931

4,151

11,521

15,495

Other income

Equity in losses of unconsolidated affiliates

(499)

(67)

(1,923)

(183)
Other income

271

1,085

714

1,574
Gain on sale or conversion of real estate investments

6,557

—

9,897

1,710
Gain on involuntary conversion

56

549

603

1,236
Total other income

6,385

1,567

9,291

4,337
Net income
$
10,316

$
5,718

$
20,812

$
19,832
Net income attributable to noncontrolling interest:

Operating partnership

6,601

3,753

13,277

12,861
Partially owned properties

(53)

(139)

(15)

(148)
Net income attributable to Sterling Real Estate Trust
$
3,768

$
2,104

$
7,550

$
7,119

Net income attributable to Sterling Real Estate Trust per common share, basic and diluted
$
0.35

$
0.21

$
0.71

$
0.71

Comprehensive income:

Net income
$
10,316

$
5,718

$
20,812

$
19,832
Other comprehensive gain (loss) - change in fair value of interest rate swaps

4,967

(66)

15,306

1,473
Comprehensive income

15,283

5,652

36,118

21,305
Comprehensive income attributable to noncontrolling interest

9,707

3,571

23,021

13,661
Comprehensive income attributable to Sterling Real Estate Trust
$
5,576

$
2,081

$
13,097

$
7,644

Weighted average Common Shares outstanding, basic and diluted

10,685

10,215

10,572

10,095


	March 31,		December 31,
	2023		2022

	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	129,982	$	129,682
Building and improvements		837,190		834,356
Construction in progress		6,086		7,110
Real estate investments		973,258		971,148
Less accumulated depreciation		(200,576)		(194,849)
Real estate investments, net		772,682		776,299
Cash and cash equivalents		12,064		3,257
Restricted deposits		9,245		9,323
Investment in securities		10,111		29,371
Investment in unconsolidated affiliates		29,889		29,423
Notes receivable		9,789		8,448
Lease intangible assets, less accumulated amortization		4,589		5,290
Other assets, net		24,789		27,312

Total Assets	$	873,158	$	888,723

LIABILITIES
Mortgage notes payable, net	$	529,775	$	506,167
Notes payable		—		26,500
Lines of credit		—		1,008
Dividends payable		8,520		8,493
Tenant security deposits payable		6,569		6,368
Lease intangible liabilities, less accumulated amortization		609		646
Accrued expenses and other liabilities		13,648		16,075
Total Liabilities		559,121		565,257

COMMITMENTS and CONTINGENCIES - Note 13

SHAREHOLDERS' EQUITY
Beneficial interest		123,681		123,996
Noncontrolling interest
Operating partnership		176,352		183,048
Partially owned properties		2,600		2,640
Accumulated other comprehensive income		11,404		13,782
Total Shareholders' Equity		314,037		323,466

	$	873,158	$	888,723

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS’ EQUITY~~OPERATIONS AND OTHER COMPREHENSIVE (LOSS) INCOME

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~September 30,~~March 31, 2023 and 2022(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, 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
Shares/units redeemed

(18)

(386)

-

(386)

(138)

-

-

(524)
Dividends and distributions declared

-

-

(3,037)

(3,037)

(5,357)

-

-

(8,394)
Dividends reinvested - stock dividend

86

1,877

-

1,877

-

-

-

1,877
Issuance of shares under optional purchase plan

35

806

-

806

-

-

-

806
Change in fair value of interest rate swaps

-

-

-

-

-

-

3,815

3,815
Net income

-

-

2,568

2,568

4,531

8

-

7,107
BALANCE AT JUNE 30, 2022

10,563

$ 153,487

($ 33,968)

$ 119,519

$ 182,621

$ 2,695

$ 9,389

$ 314,224
Contribution of assets in exchange for the issuance of noncontrolling interest shares

-

-

-

-

2,210

-

-

2,210
Shares issued under trustee compensation plan

3

65

-

65

-

-

-

65
Shares/units redeemed

(14)

(310)

-

(310)

(293)

-

-

(603)
Dividends and distributions declared

-

-

(3,070)

(3,070)

(5,381)

-

-

(8,451)
Dividends reinvested - stock dividend

87

1,910

-

1,910

-

-

-

1,910
Issuance of shares under optional purchase plan

41

939

-

939

-

-

-

939
Change in fair value of interest rate swaps

-

-

-

-

-

-

4,967

4,967
Net income

-

-

3,768

3,768

6,601

(53)

-

10,316
BALANCE AT SEPTEMBER 30, 2022

10,680

$ 156,091

($ 33,270)

$ 122,821

$ 185,758

$ 2,642

$ 14,356

$ 325,577


	Three Months Ended
	March 31,
	2023		2022

	(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	35,180	$	32,916
Expenses
Expenses from rental operations
Operating expenses		18,122		14,689
Real estate taxes		3,799		3,497
Depreciation and amortization		6,552		5,782
Interest		5,355		4,845
		33,828		28,813
Administration of REIT		1,311		1,217
Total expenses		35,139		30,030
Income from operations		41		2,886

Other income
Equity in (losses) of unconsolidated affiliates		(1,136)		(1,141)
Other income		407		290
Gain on sale or conversion of real estate investments		—		1,329
Gain on involuntary conversion		—		25
Total other (loss) income		(729)		503
Net (loss) income	$	(688)	$	3,389
Net (loss) income attributable to noncontrolling interest:
Operating partnership		(408)		2,145
Partially owned properties		(40)		30
Net (loss) income attributable to Sterling Real Estate Trust	$	(240)	$	1,214

Net (loss) income attributable to Sterling Real Estate Trust per common share, basic and diluted	$	(0.02)	$	0.12

Comprehensive income:
Net (loss) income	$	(688)	$	3,389
Other comprehensive (loss) gain - change in fair value of interest rate swaps		(2,378)		6,524
Comprehensive (loss) income		(3,066)		9,913
Comprehensive (loss) income attributable to noncontrolling interest		(1,948)		6,342
Comprehensive (loss) income attributable to Sterling Real Estate Trust	$	(1,118)	$	3,571

Weighted average common shares outstanding, basic and diluted		10,952		10,465

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

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

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2021~~March 31, 2023 and 2022 (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, 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


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

	(in thousands)															(in thousands)
BALANCE AT DECEMBER 31, 2020	9,855	$ 139,105		($ 29,739)		$ 109,366		$ 181,621		$ 2,346		($ 1,805)		$ 291,528
BALANCE AT DECEMBER 31, 2022																10,810	$ 159,003	($ 35,007)	$ 123,996	$ 183,048	$ 2,640	$ 13,782	$ 323,466
Shares/units redeemed	(41)	(777)		-		(777)		(628)		-		-		(1,405)		(8)	(181)	-	(181)	(915)	-	-	(1,096)
Dividends and distributions declared	—	-		(2,642)		(2,642)		(4,835)		-		-		(7,477)		-	-	(3,147)	(3,147)	(5,373)	-	-	(8,520)
Dividends reinvested - stock dividend	89	1,686		-		1,686		-		-		-		1,686		90	1,962	-	1,962	-	-	-	1,962
Issuance of shares under optional purchase plan	65	1,307		-		1,307		-		-		-		1,307		56	1,291	-	1,291	-	-	-	1,291
Change in fair value of interest rate swaps	—	-		-		-		-		-		2,384		2,384		-	-	-	-	-	-	(2,378)	(2,378)
Net income (loss)	—	-		2,052		2,052		3,753		31		-		5,836
BALANCE AT MARCH 31, 2021	9,968	$ 141,321		($ 30,329)		$ 110,992		$ 179,911		$ 2,377		$ 579		$ 293,859
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-		-		-		-		890		-		-	890
Shares/units redeemed	(15)	(292)		-		(292)		(1,853)		-		-		(2,145)
Dividends and distributions declared	-	-		(2,672)		(2,672)		(4,821)		-		-		(7,493)
Dividends reinvested - stock dividend	88	1,679		-		1,679		-		-		-		1,679
Issuance of shares under optional purchase plan	41	820		-		820		-		-		-		820
Change in fair value of interest rate swaps	-	-		-		-		-		-		(845)		(845)
Net income	-	-		2,963		2,963		5,355		(40)		-		8,278
BALANCE AT JUNE 30, 2021	10,082	$ 143,528		($ 30,038)		$ 113,490		$ 179,482		$ 2,337		($ 266)		$ 295,043
Contribution of assets in exchange for the issuance of noncontrolling interest shares	-		-		-		-		1,993		-		-		1,993
Shares issued under trustee compensation plan	3	57		-		57		-		-		-		57
Shares/units redeemed	(6)	(105)		-		(105)		(810)		-		-		(915)
Dividends and distributions declared	-	-		(2,707)		(2,707)		(4,836)		-		-		(7,543)
Dividends reinvested - stock dividend	92	1,743		-		1,743		-		-		-		1,743
Issuance of shares under optional purchase plan	44	886		-		886		-		-		-		886
Change in fair value of interest rate swaps	-	-		-		-		-		-		(66)		(66)
Net income (loss)	-	-		2,104		2,104		3,753		(139)		-		5,718
BALANCE AT SEPTEMBER 30, 2021	10,215	$ 146,109		($ 30,641)		$ 115,468		$ 179,582		$ 2,198		($ 332)		$ 296,916
Net loss																-	-	(240)	(240)	(408)	(40)	-	(688)
BALANCE AT MARCH 31, 2023																10,948	$ 162,075	($ 38,394)	$ 123,681	$ 176,352	$ 2,600	$ 11,404	$ 314,037

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~THREE MONTHS ENDED ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (UNAUDITED)

Nine Months Ended

September 30,

2022

2021

(in thousands)
OPERATING ACTIVITIES

Net income

$
20,812

$
19,832
Adjustments to reconcile net income to net cash provided by operating activities

Gain on sale of real estate investments

(9,897)

(1,710)
Gain on involuntary conversion

(603)

(1,236)
Change in fair value of securities

(62)

—
Equity in loss of unconsolidated affiliates

1,923

183
Distributions of earnings of unconsolidated affiliates

219

174
Allowance for uncollectible accounts receivable

(164)

502
Depreciation

16,445

15,665
Amortization

1,420

971
Amortization of debt issuance costs

506

402
Effects on operating cash flows due to changes in

Other assets

(1,426)

(1,160)
Tenant security deposits payable

1,080

298
Accrued expenses and other liabilities

(1,496)

(1,081)
NET CASH PROVIDED BY OPERATING ACTIVITIES

28,757

32,840
INVESTING ACTIVITIES

Purchase of securities

(42,000)

-
Purchase of real estate investment properties

(26,365)

(35,893)
Capital expenditures and tenant improvements

(8,251)

(13,629)
Proceeds from sale of real estate investments and non-real estate investments

22,441

5,590
Proceeds from involuntary conversion

1,049

4,095
Investment in unconsolidated affiliates

(10,068)

(5,845)
Distributions in excess of earnings received from unconsolidated affiliates

408

—
Notes receivable issued net of payments received

(292)

(3,430)
NET CASH USED IN INVESTING ACTIVITIES

(63,078)

(49,112)
FINANCING ACTIVITIES

Payments for financing, debt issuance

(305)

(700)
Payments on investment certificates and subordinated debt

—

(25)
Proceeds from issuance of mortgage notes payable and subordinated debt

37,569

71,530
Principal payments on mortgage notes payable

(16,239)

(30,360)
Proceeds from issuance of shares under optional purchase plan

3,058

3,013
Shares/units redeemed

(1,863)

(4,465)
Dividends/distributions paid

(18,824)

(17,309)
NET CASH PROVIDED BY FINANCING ACTIVITIES

3,396

21,684
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS

(30,925)

5,412
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

$
29,731

$
33,047

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD

Cash and cash equivalents

$
20,464

$
22,168
Restricted deposits

9,267

10,879
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD

$
29,731

$
33,047


	Three Months Ended
	March 31,
	2023		2022

	(in thousands)
OPERATING ACTIVITIES
Net (loss) income	$	(688)	$	3,389
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Gain on sale or conversion of real estate investments		—		(1,329)
Change in fair value of securities		(109)		—
Equity in loss of unconsolidated affiliates		1,136		1,141
Distributions of earnings of unconsolidated affiliates		—		4
Allowance for uncollectible accounts receivable		(225)		(544)
Depreciation		5,801		5,390
Amortization		751		392
Amortization of debt issuance costs		153		157
Effects on operating cash flows due to changes in
Other assets		434		1,583
Tenant security deposits payable		201		362
Accrued expenses and other liabilities		(2,980)		(3,088)
NET CASH PROVIDED BY OPERATING ACTIVITIES		4,474		7,457
INVESTING ACTIVITIES
Proceeds from maturity of securities		19,369		—
Purchase of real estate investment properties		—		(4,893)
Capital expenditures and tenant improvements		(1,782)		(2,402)
Proceeds from sale of real estate investments and non-real estate investments		—		2,622
Proceeds from involuntary conversion		—		261
Investment in unconsolidated affiliates		(2,261)		(6,444)
Distributions in excess of earnings received from unconsolidated affiliates		659		105
Notes receivable issued net of payments received		(1,341)		564
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		14,644		(10,187)
FINANCING ACTIVITIES
Payments for financing, debt issuance		(158)		(95)
Proceeds from issuance of mortgage notes payable and subordinated debt		30,250		12,867
Principal payments on mortgage notes payable		(6,637)		(3,931)
Payments on lines of credit		(1,008)		—
Payment on notes payable		(26,500)		—
Proceeds from issuance of shares under optional purchase plan		1,291		1,313
Shares/units redeemed		(1,096)		(736)
Dividends/distributions paid		(6,531)		(5,851)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(10,389)		3,567
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS		8,729		837
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD		12,580		60,656
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD	$	21,309	$	61,493

CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD
Cash and cash equivalents	$	12,064	$	49,854
Restricted deposits		9,245		11,639
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD	$	21,309	$	61,493

(Continued)

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

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

FOR THE ~~NINE~~THREE MONTHS ENDED ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (UNAUDITED) (Continued)

Nine Months Ended

September 30,

2022

2021

(in thousands)
SCHEDULE OF CASH FLOW INFORMATION

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

$
14,412

$
12,812

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Dividends reinvested

$
5,503

$
5,108
Dividends declared and not paid

3,070

2,707
UPREIT distributions declared and not paid

5,381

4,836
Shares issued pursuant to trustee compensation plan

65

57
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT

12,390

2,883
Increase in land improvements due to increase in special assessments payable

217

204
Unrealized gain on interest rate swaps

15,306

1,473
Acquisition of assets through assumption of debt and liabilities

38,755

569
Capitalized interest and real estate taxes related to construction in progress

68

200


	Three Months Ended
	March 31,
	2023		2022

	(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	5,061	$	4,698

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	1,962	$	1,716
Dividends declared and not paid		3,147		3,007
UPREIT distributions declared and not paid		5,373		5,359
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		—		10,180
Increase in land improvements due to increase in special assessments payable		300		—
Unrealized (loss) gain on interest rate swaps		(2,378)		6,524
Acquisition of assets through assumption of debt and liabilities		—		(15,073)
Capitalized interest and real estate taxes related to construction in progress		—		23

See Notes to Consolidated Financial Statements

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (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~~operating partnership (Sterling Properties, ~~LLLP”~~LLLP or the “Operating Partnership”) and transferred all of its assets and liabilities to the ~~operating partnership~~Operating Partnership in exchange for general partnership units. As the general partner, ~~of Sterling Properties, LLLP,~~ Sterling has management responsibility for all activities of the Operating Partnership. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, Sterling owned approximately ~~36.33%~~36.94% and ~~36.22%~~36.60%, respectively, of the Operating Partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2021,~~2022, 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 ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023. These adjustments are of a normal recurring nature.

Principles of Consolidation

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

As of ~~September 30, 2022~~March 31, 2023 the Trust owned approximately ~~36.33%~~ 36.94% 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,~~LLLP Agreement and the redemptions plans, these persons have the right to ~~tender~~request the Operating Partnership redeem their OP Units ~~for redemption to the Operating Partnership at any time~~ following a specified restricted ~~period~~period. All redemptions are at the sole discretion of the Trust, acting for itself or in its capacity as General Partner of the Operating Partnership, and further subject to the conditions and limitations of the LLLP Agreement and redemption plans, as the same may be amended or modified from time to time. If the Trust accepts a redemption request, the redemption of OP Units shall be made in cash in an amount 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 and in its sole and absolute discretion, 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

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(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 the primary beneficiary of a variable interest entity (VIE) and has substantial influence and control of the entity.

In instances where the Trust determines that it is not the primary beneficiary of a VIE and 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 (losses) of unconsolidated affiliates on its consolidated statements of operations and comprehensive loss. Additionally, the Trust’s net investment in the joint venture will be reflected as investment in unconsolidated ~~entity~~affiliates 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.

Sterling may also acquire property using a reverse like-kind exchange structure (a “Reverse 1031 Like-Kind Exchange”) under Section 1031 of the Internal Revenue Code of 1986, as amended, to defer taxable gains on the subsequent sale of real estate property. As such, the acquired property (the “Parked Property”) is in the possession of a qualified intermediary engaged to execute the Reverse 1031 Like-Kind Exchange until the subsequent sale transaction and the Reverse 1031 Like-Kind Exchange are completed. Sterling retains essentially all of the legal and economic benefits and obligations related to the Parked Property prior to the completion of the Reverse 1031 Like-Kind Exchange. As such, a Parked Property is included in Sterling’s consolidated financial statements as a consolidated VIE until legal title is transferred to the Operating Partnership upon completion of the Reverse 1031 Like-Kind Exchange. Sterling may also dispose of property under Section 1033 (an involuntary conversion) in which case taxable gains are also deferred.

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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

Real Estate Investments

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

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

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

lease intangibles, and (v) assumed financing that is determined to be above or below market, if any. Transaction costs related to acquisitions are accounted for as asset acquisitions ~~are~~and capitalized as a cost of the property.

For tangible assets acquired, including land, building and other improvements, the Trust considers available comparable market and industry information in estimating acquisition date fair value. Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

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		55-9 years~~-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 no impairment losses during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

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 ~~generally~~ the same manner as they are taxed on other corporate distributions.

We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the financial statements.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

We follow ~~FASB~~ ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022, 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 2018.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

Revenue Recognition

The Trust is the lessor for its residential and commercial leases. Leases are analyzed on an individual basis to determine lease classification. As of ~~September 30, 2022~~March 31, 2023, all leases analyzed under the Trust’s lease classification process were determined to be operating leases.

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 no dilutive potential common shares during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ Sterling’s denominators for the basic and diluted earnings per

common share were approximately ~~10,572,000~~10,952,000 and ~~10,095,000,~~10,465,000, respectively.

NOTE 3 – segment reporting

We report our results in two 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 three months ended March 31, 2023 and 2022, 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, 2023						Three months ended March 31, 2022
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Income from rental operations	$	29,920	$	5,260	$	35,180	$	27,494	$	5,422	$	32,916
Expenses from rental operations		20,203		1,718		21,921		16,508		1,678		18,186
Net operating income	$	9,717	$	3,542	$	13,259	$	10,986	$	3,744	$	14,730
Depreciation and amortization						6,552						5,782
Interest						5,355						4,845
Administration of REIT						1,311						1,217
Other loss (income)						729						(503)
Net (loss) income					$	(688)					$	3,389

1211

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

~~Segment Revenues and Net Operating Income~~

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and nine months ended September 30, 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 September 30, 2022

Three months ended September 30, 2021


Residential

Commercial

Total

Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
29,226

$
5,305

$
34,531

$
27,838

$
5,215

$
33,053
Expenses from rental operations

16,211

1,717

17,928

15,352

2,321

17,673
Net operating income

$
13,015

$
3,588

$
16,603

$
12,486

$
2,894

$
15,380
Depreciation and amortization

6,120

5,551
Interest

5,081

4,671
Administration of REIT

1,471

1,007
Other income

(6,385)

(1,567)
Net income

$
10,316

$
5,718

Nine months ended September 30, 2022

Nine months ended September 30, 2021


Residential

Commercial

Total

Residential

Commercial

Total

(in thousands)

(in thousands)
Income from rental operations

$
85,222

$
16,042

$
101,264

$
80,028

$
16,708

$
96,736
Expenses from rental operations

47,964

4,945

52,909

42,564

5,515

48,079
Net operating income

$
37,258

$
11,097

$
48,355

$
37,464

$
11,193

$
48,657
Depreciation and amortization

17,865

16,634
Interest

14,882

13,261
Administration of REIT

4,087

3,267
Other income

(9,291)

(4,337)
Net income

$
20,812

$
19,832

Segment Assets and Accumulated Depreciation


As of September 30, 2022	Residential		Commercial		Total
As of March 31, 2023							Residential		Commercial		Total

	(in thousands)						(in thousands)
Real estate investments	$	728,010	$	193,649	$	921,659	$	781,600	$	191,658	$	973,258
Accumulated depreciation		(144,226)		(46,790)		(191,016)		(151,675)		(48,901)		(200,576)
Total real estate investments, net	$	583,784	$	146,859	$	730,643	$	629,925	$	142,757	$	772,682
Lease intangible assets, less accumulated amortization		209		5,347		5,556		328		4,261		4,589
Cash and cash equivalents						20,464						12,064
Restricted deposits						9,267						9,245
Investment in securities						42,062						10,111
Investment in unconsolidated affiliates						26,176						29,889
Notes receivable						7,749						9,789
Other assets, net						25,868						24,789
Total Assets					$	867,785					$	873,158

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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


As of December 31, 2022	Residential		Commercial		Total

	(in thousands)
Real estate investments	$	779,424	$	191,724	$	971,148
Accumulated depreciation		(147,115)		(47,734)		(194,849)
Total real estate investments, net	$	632,309	$	143,990	$	776,299
Lease intangible assets, less accumulated amortization		839		4,451		5,290
Cash and cash equivalents						3,257
Restricted deposits						9,323
Investment in securities						29,371
Investment in unconsolidated affiliates						29,423
Notes receivable						8,448
Other assets, net						27,312
Total Assets					$	888,723

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
Lease 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

NOTE 4 – ~~Restricted~~restricted deposits and ~~FUNDED~~funded reserves

The following table summarizes the Trust’s restricted deposits and funded reserves.


	As of September 30,		As of December 31,		As of March 31,		As of December 31,
	2022		2021		2023		2022

	(in thousands)				(in thousands)
Tenant security deposits	$	6,218	$	5,165	$	6,410	$	6,242
Real estate tax and insurance escrows		1,154		1,355		1,051		1,336
Replacement reserves		1,895		1,791		1,784		1,745
Other funded reserves		—		838
	$	9,267	$	9,149	$	9,245	$	9,323

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

NOTE 5 – ~~Investment in unconsolidated affiliates~~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, 2023		December 31, 2022
Banner Building	2007	66.67%	$	(444)	$	(614)
Grand Forks INREIT, LLC	2003	50%		5,057		4,961
SE Savage, LLC	2019	60%		1,479		1,660
SE Maple Grove, LLC	2019	60%		1,277		1,836
SE Rogers, LLC	2020	60%		2,019		2,413
ST Oak Cliff, LLC	2021	70%		8,922		9,098
SE Brooklyn Park, LLC	2021	60%		2,354		2,914
SE Fossil Creek, LLC	2022	70%		9,225		7,155
			$	29,889	$	29,423

Total Investment in Unconsolidated Affiliates at
Unconsolidated Affiliates

Date Acquired

Trust Ownership Interest

September 30,
2022

December 31, 2021
Banner Building

2007

66.67%

$
(608)

$
60
Grand Forks INREIT, LLC

2003

50%

3,635

2,493
SE Savage, LLC

2019

60%

1,892

2,946
SE Maple Grove, LLC

2019

60%

1,859

2,823
SE Rogers, LLC

2020

60%

2,546

2,986
ST Oak Cliff, LLC

2021

70%

9,214

4,324
SE Brooklyn Park, LLC

2021

60%

2,995

3,026
SE Fossil Creek, LLC

2022

70%

4,643

-

$
26,176

$
18,658

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

The Operating Partnership owns a 66.67% interest as tenant in common in an office building in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 of $6,860 and $6,951, ~~and $6,329,~~ respectively. ~~The Trust is jointly and severally liable for the full mortgage balance.~~

The Operating Partnership ~~owns~~is a 50% ~~interest as~~owner of a tenant in common through 100% ownership in a limited liability company. The property is located in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 of ~~$9,606~~$9,453 and ~~$9,794,~~$9,520, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 60% interest in a limited liability company that holds a multifamily property. The ~~property~~entity is encumbered by a first mortgage with a balance at March 31, 2023 of ~~$30,829~~$30,622 and $30,726, respectively. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at ~~September 30, 2022.~~March 31, 2023 and December 31, 2021 of $744 and $1,397, respectively. 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 September 30, 2022, SE Savage, LLC has an outstanding Promissory Note with Sterling Properties, LLLP, for $1,397, and is an unsecured obligation of SE Savage, LLC. 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 September 30, 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~~construction mortgage with a balance at both ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 of $24,788. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at ~~September 30, 2022~~both March 31, 2023 and December 31, ~~2021~~2022 of ~~$3,643~~$3,643. The Trust is jointly and ~~$727, respectively.~~severally liable for the full mortgage balance.

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 ~~$32,516~~$33,853 and ~~$22,847~~$32,864 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The entity is encumbered by a ~~first~~construction mortgage ~~has~~with a balance at both March 31, 2023December 31, 2022 of ~~$25,742 and $15,688 at September 30, 2022 and December 31, 2021, respectively. The Company is jointly and severally liable for the full mortgage balance.~~$25,742. The property is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at ~~September 30,~~March 31, 2023 and December 31, 2022 of ~~$2,216.~~$3,292 and $2,938, respectively. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of ~~September 30,~~both March 31, 2023 and December 31, 2022, the Operating Partnership has contributed ~~$4,939~~$9,300, in cash to the entity. The entity holds land located in Dallas, Texas with total assets of ~~$32,608~~$45,481 and ~~$7,394~~$40,404 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The entity is encumbered by a construction mortgage with a balance of $15,348 at September 30, 2022. There was no balance outstanding related to the construction mortgage at December 31, 2021. 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 September 30, 2022, the Operating Partnership has contributed $3,042 in cash to the LLC. The entity is located in Brooklyn Park, Minnesota, with total assets of $27,382 and $5,478 at September 30, 2022 and December 31, 2021, respectively. The entity is encumbered by a first mortgage that has a balance of $20,007 at September 30, 2022. There was no balance outstanding related to the first mortgage at December 31, 2021. The Company is jointly and severally liable for the full mortgage balance.

During the second quarter of 2022, the Operating Partnership entered into a joint venture arrangement. Through the joint venture, the Operating Partnership owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of September 30, 2022, the Operating Partnership has contributed $4,664 in cash to the entity. The entity holds land located in Fort Worth, Texas with total assets of $8,272 at September 30, 2022.

1513

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

with a balance outstanding related to the mortgage at March 31, 2023 and December 31, 2022 of $28,659 and $23,409, 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, with an unrelated third party. The entity is currently developing a multifamily property. The entity is located in Brooklyn Park, Minnesota, with total assets of $30,822 and $30,490 at March 31, 2023 and December 31, 2022, respectively. The entity is encumbered by a construction mortgage that has a balance of $24,592 and $24,448 at March 31, 2023 and December 31, 2022, respectively. The entity is also encumbered by a second mortgage to Sterling Properties, LLLP with a balance at March 31, 2023 of $1,659. There was no outstanding balance related to the second mortgage as December 31, 2022. The Trust is jointly and severally liable for the full mortgage balance.

The Operating Partnerships owns a 70% interest in a limited liability company, with a related party. The entity is currently developing a multifamily property. As of March 31, 2023 and December 31, 2022 the Operating Partnership has contributed $9,275 and $7,190, respectively, in cash to the entity. The entity holds land located in Fort Worth Texas with total assets of $20,731 and $11,083 at March 31, 2023 and December 31, 2022, respectively. The entity is encumbered by a construction mortgage with a balance outstanding related to the mortgage at March 31, 2023 of $2,726. There was no outstanding balance related to the mortgage at December 31, 2022. The Trust is jointly and severally liable for the full mortgage balance.

The following is a summary of the financial position of the unconsolidated affiliates at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

September 30,
2022

December 31, 2021

(in thousands)
ASSETS

Real estate investments

$
202,492

$
134,839
Accumulated depreciation

(15,158)

(10,940)

187,334

123,899
Cash and cash equivalents

2,054

1,131
Restricted deposits

856

650
Intangible assets, less accumulated amortization

349

41
Other assets, net

740

909
Total Assets

$
191,333

$
126,630

LIABILITIES

Mortgage notes payable, net

$
139,087

$
87,996
Tenant security deposits payable

192

108
Accrued expenses and other liabilities

10,415

8,029
Total Liabilities

$
149,694

$
96,133
SHAREHOLDERS' EQUITY

Total Shareholders' Equity

$
41,639

$
30,497

Total liabilities and shareholders' equity

$
191,333

$
126,630

~~The following is a summary of results of operations of the unconsolidated affiliates for the three and nine months ended September 30, 2022~~

Three months ended
September 30,

Nine months ended September 30,


2022

2021

2022

2021

(in thousands)

(in thousands)
Income from rental operations

$
2,638

$
1,296

$
6,444

$
3,109
Expenses from rental operations

957

417

2,451

999
Net operating income

$
1,681

$
879

$
3,993

$
2,110
Depreciation and Amortization

1,316

358

4,331

871
Interest

1,178

644

2,854

1,524
Other expense

2

(9)

13

(9)
Net loss

$
(815)

$
(114)

$
(3,205)

$
(276)


	March 31, 2023		December 31, 2022

	(in thousands)
ASSETS
Real estate investments	$	234,751	$	218,747
Accumulated depreciation		(18,966)		(16,490)
		215,785		202,257
Cash and cash equivalents		2,815		3,093
Restricted deposits		1,297		1,034
Note receivable		1,224		—
Intangible assets, less accumulated amortization		822		542
Other assets, net		724		827
Total Assets	$	222,667	$	207,753

LIABILITIES
Mortgage notes payable, net	$	161,649	$	152,246
Tenant security deposits payable		248		192
Accrued expenses and other liabilities		13,180		8,217
Total Liabilities	$	175,077	$	160,655
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	47,590	$	47,098

Total liabilities and shareholders' equity	$	222,667	$	207,753

1614

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

The following is a summary of results of operations of the unconsolidated affiliates for the three months ended March 31, 2023 and 2022.


	Three months ended March 31,
	2023		2022

	(in thousands)
Income from rental operations	$	3,707	$	1,730
Expenses from rental operations		1,778		812
Net operating income	$	1,929	$	918
Depreciation and Amortization		2,492		1,827
Interest		1,344		1,012
Other expense		(85)		10
Net loss	$	(1,822)	$	(1,931)

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 September 30, 2022	Intangibles		Amortization		Intangibles, net
As of March 31, 2023							Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	15,305	$	(10,758)	$	4,547	$	15,528	$	(11,632)	$	3,896
Above-market leases		2,466		(1,457)		1,009		1,897		(1,204)		693
	$	17,771	$	(12,215)	$	5,556	$	17,425	$	(12,836)	$	4,589
Lease Intangible Liabilities
Below-market leases	$	(2,380)	$	1,696	$	(684)	$	(2,380)	$	1,771	$	(609)


	Lease		Accumulated		Lease		Lease		Accumulated		Lease
As of December 31, 2021	Intangibles		Amortization		Intangibles, net
As of December 31, 2022							Intangibles		Amortization		Intangibles, net

Lease Intangible Assets	(in thousands)						(in thousands)
In-place leases	$	15,455	$	(10,381)	$	5,074	$	15,528	$	(10,960)	$	4,568
Above-market leases		2,617		(1,445)		1,172		1,897		(1,175)		722
	$	18,072	$	(11,826)	$	6,246	$	17,425	$	(12,135)	$	5,290
Lease Intangible Liabilities
Below-market leases	$	(2,525)	$	1,714	$	(811)	$	(2,379)	$	1,733	$	(646)

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


	Intangible		Intangible		Intangible		Intangible
Years ending December 31,	Assets		Liabilities		Assets		Liabilities

	(in thousands)				(in thousands)
2022 (October 1, 2022 - December 31, 2022)	$	388	$	38
2023		857		151
2023 (April 1, 2023 - December 31, 2023)					$	896	$	113
2024		827		151		757		151
2025		827		151		757		151
2026		676		80		606		80
2027						498		42
Thereafter		1,981		113		1,075		72
	$	5,556	$	684	$	4,589	$	609

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

NOTE 7 – LINES OF CREDIT

We have a $4,915 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in December 2026; and a $5,000 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires December 2026. The lines of credit are secured by specific properties. At ~~September 30, 2022,~~March 31, 2023, the Bremer Bank line of credit secures one letter of credit totaling $50, leaving $9,865 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. There ~~were~~was no ~~balances~~balance outstanding on either line ~~as of September 30, 2022 or~~at March 31, 2023 and $1,008 at December 31, ~~2021.~~2022.

Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.

NOTE 8 - NOTES PAYABLE

On December 29, 2022, the Trust entered into a $26,500 note payable. The note payable bears interest at a rate of one percentage point under the “Prime Rate” as published in the Wall Street Journal, with principal plus accrued and unpaid interest due and payable on February 1, 2023. The Borrower may prepay the New Promissory Note without penalty. As of March 31, 2023, the Trust did not have any outstanding balance on the note payable. As of December 31, 2022, the balance on the note payable was $26,500.

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


	Principal Balance At
	March 31,		December 31,
	2023		2022

	(in thousands)
Fixed rate mortgage notes payable (a)	$	531,918	$	508,305
Variable rate mortgage notes payable		-		-
Mortgage notes payable		531,918		508,305
Less unamortized debt issuance costs		2,143		2,138
	$	529,775	$	506,167

(a)	Includes $105,340 and $108,734 of variable rate mortgage debt that was swapped to a fixed rate at March 31, 2023 and December 31, 2022, respectively.

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
	(in thousands)
2023 (April 1, 2023 - December 31, 2023)	$	46,741
2024		22,433
2025		53,190
2026		73,110
2027		77,912
Thereafter		258,532
Total payments	$	531,918

1716

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (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

September 30,

December 31,

2022

2021

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

$
514,297

$
490,413
Variable rate mortgage notes payable

-

5,237
Mortgage notes payable

514,297

495,650
Less unamortized debt issuance costs

2,307

2,508

$
511,990

$
493,142

~~(a)~~

~~Includes $106,717 and $108,734 of variable rate mortgage debt that was swapped to a fixed rate at September 30, 2022 and December 31, 2021, respectively.~~

~~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

(in thousands)
2022 (October 1, 2022 - December 31, 2022)

$
6,055
2023

53,006
2024

22,653
2025

53,130
2026

45,546
Thereafter

333,907
Total payments

$
514,297

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

As of ~~September 30, 2022,~~March 31, 2023, the Trust used 12 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 ~~income (loss)~~loss and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. ~~Over~~During the next ~~twelve~~12 months, the Trust estimates that an additional ~~$758~~$3,039 will be reclassified as a decrease to interest expense.

The following table summarizes the Trust’s interest rate swaps as of March 31, 2023, which effectively convert on month floating rate LIBOR to a fixed rate:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
November 1, 2019	$	6,523	3.15%	November 1, 2029
November 1, 2019	$	4,536	3.28%	November 1, 2029
January 10, 2020	$	2,956	3.39%	January 10, 2030
July 1, 2020	$	4,716	2.79%	June 10, 2030
December 2, 2020	$	12,273	2.91%	December 2, 2027
July 1, 2021	$	25,512	2.99%	July 1, 2031
November 10, 2021	$	27,903	3.54%	August 1, 2029
December 1, 2021	$	10,739	3.32%	December 1, 2031
August 15, 2022	$	1,479	3.07%	June 15, 2030
August 15, 2022	$	2,865	3.07%	June 15, 2030
August 15, 2022	$	1,601	2.94%	June 15, 2030
August 15, 2022	$	4,237	2.94%	June 15, 2030

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


	Number of Instruments			Notional
Interest Rate Derivatives	March 31, 2023	December 31, 2022		March 31, 2023		December 31, 2022
Interest rate swaps	12	12	$	105,340	$	106,033

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 10 to the consolidated financial statements.


Derivatives designated as	March 31, 2023			December 31, 2022
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	11,404	Other assets, net	$	13,782
Interest rate swaps	Accrued expenses and other liabilities	$	—	Accrued expenses and other liabilities	$	—

The carrying amount of the swaps have been adjusted to their fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting an asset and liability for the fair value of the future net payments

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

~~The following table summarizes the Trust’s interest rate swaps as of September 30, 2022, which effectively convert one month floating rate LIBOR or 30-day average SOFR to a fixed rate:~~

Fixed

Effective Date

Notional

Interest Rate

Maturity Date
November 1, 2019
$
6,627

3.15%

November 1, 2029
November 1, 2019
$
4,607

3.28%

November 1, 2029
January 10, 2020
$
3,001

3.39%

January 10, 2030
July 1, 2020
$
4,771

2.79%

June 10, 2030
December 2, 2020
$
12,452

2.91%

December 2, 2027
July 1, 2021
$
25,844

2.99%

July 1, 2031
November 10, 2021
$
28,187

3.54%

August 1, 2029
December 1, 2021
$
10,885

3.32%

December 1, 2031
August 15, 2022
$
1,502

3.07%

June 15, 2030
August 15, 2022
$
2,910

3.07%

June 15, 2030
August 15, 2022
$
1,627

2.94%

June 15, 2030
August 15, 2022
$
4,304

2.94%

June 15, 2030

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

Number of Instruments

Notional
Interest Rate Derivatives

September 30, 2022

December 31, 2021

September 30, 2022

December 31, 2021
Interest rate swaps

12

12
$
106,717
$
108,734

Derivatives
Derivatives designated as

September 30, 2022

December 31, 2021
cash flow hedges:

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value
Interest rate swaps

Other assets, net
$
14,356

Other assets, net
$
698
Interest rate swaps

Accrued expenses and other liabilities
$
—

Accrued expenses and other liabilities
$
1,648

The carrying amounts 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 and 30-day average SOFR, resulted in reporting an asset and liability for the fair value of the future net payments forecasted under the swap. ~~Accounting for~~The interest rate ~~swaps~~swap is ~~considered~~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.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

The following table presents the effect of the ~~Trust’s~~Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the ~~three months~~quarters ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

Location of Gain

Amount of (Gain)/Loss

Reclassified from

Derivatives in

Recognized in Other

Accumulated other

Amount of (Gain)/Loss
Cash Flow Hedging

Comprehensive Income

Comprehensive Income

Reclassified from
Relationships

on Derivatives

(AOCI) into Income

AOCI into Income

2022

2022
Interest rate swaps
$
(4,967)

Interest expense
$
(71)

2021

2021
Interest rate swaps
$
66

Interest expense
$
199

The following table presents the effect of the Trust’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the nine months ended September 30, 2022 and 2021:



			Location of Gain					Location of Gain
		Amount of (Gain)/Loss	Reclassified from				Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		AOCI into Income		on Derivatives	(AOCI) into Income		AOCI into Income
		2022			2022		2023			2023
Interest rate swaps	$	(15,306)	Interest expense	$	548	$	2,378	Interest expense	$	(765)
		2021			2021		2022			2022
Interest rate swaps	$	(1,473)	Interest expense	$	433	$	(6,524)	Interest expense	$	361

Credit-risk-related Contingent Features

The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of ~~September 30, 2022,~~March 31, 2023, the termination value of derivatives in an asset position was ~~$14,356.~~$11,404. As of ~~September 30, 2022,~~March 31, 2023, the Trust has pledged the properties related to the loans which are hedged as ~~collateral~~collateral.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

NOTE 10 - FAIR VALUE MEASUREMENT

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


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Carrying				Carrying				Carrying				Carrying
	Value		Fair Value		Value		Fair Value		Value		Fair Value		Value		Fair Value

	(in thousands)								(in thousands)
Financial assets:
Investment in securities	$	42,062	$	42,062	$	—	$	—	$	10,111	$	10,111	$	29,371	$	29,371
Notes receivable	$	7,749	$	9,073	$	7,457	$	9,840	$	9,789	$	11,346	$	8,448	$	9,789
Derivative assets	$	14,356	$	14,356	$	698	$	698	$	11,404	$	11,404	$	13,782	$	13,782

Financial liabilities:
Mortgage notes payable	$	514,297	$	493,082	$	495,650	$	508,285	$	531,918	$	492,925	$	508,305	$	466,245
Derivative liabilities	$	—	$	—	$	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.

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

●

~~Level 1~~ – Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities as well as certain U.S. Treasury securities that are highly liquid and are actively traded in secondary markets;

●

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

●

~~Level 3~~ ~~– Instruments whose significant inputs are unobservable.~~

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

2118

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

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

●

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

●

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

●

Level 3 – Instruments whose significant inputs are unobservable.

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.


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

	(in thousands)								(in thousands)
September 30, 2022
March 31, 2023
Derivative assets	$	—	$	14,356	$	—	$	14,356	$	—	$	11,404	$	—	$	11,404

December 31, 2021
December 31, 2022
Derivative assets	$	—	$	698	$	—	$	698	$	—	$	13,782	$	—	$	13,782
Derivative liabilities	$	—	$	1,648	$	—	$	1,648

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.

~~Securities:~~The ~~market~~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 ~~security investments represents~~effect of nonperformance risk, the ~~price the investments could sell at on the open market based on market interest rates at a given point in time.~~Company has considered any applicable credit enhancements.

Fair Value Disclosures

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


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

	(in thousands)								(in thousands)
September 30, 2022
March 31, 2023
U.S. Treasury Bills									$	10,111	$	—	$	—	$	10,111
Mortgage notes payable	$	—	$	—	$	493,082	$	493,082	$	—	$	—	$	492,925	$	492,925
Notes receivable	$	—	$	—	$	9,073	$	9,073	$	—	$	—	$	11,346	$	11,346
December 31, 2021
December 31, 2022
U.S. Treasury Bills									$	29,371	$	—	$	—	$	29,371
Mortgage notes payable	$	—	$	—	$	508,285	$	508,285	$	—	$	—	$	466,245	$	466,245
Notes receivable	$	—	$	—	$	9,840	$	9,840	$	—	$	—	$	9,789	$	9,789

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

Mortgage notes payable: The ~~Company~~Trust estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Trust for similar debt instruments of comparable maturities by the Trust’s lenders. The ~~rates~~rate used ~~range~~5.75%rch 31, 2023 and ranged from ~~4.85%~~5.75% to ~~4.90% and from 3.25% to 3.35%~~6.00% at ~~September 30, 2022 and~~ December 31, ~~2021, respectively.~~2022.

Notes 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 ~~fair value~~ rate used was 7.25% at March 31, 2023 and ranged from 3.25% to 7.25%. at December 31, 2022.

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

NOTE 11 – LEASES

As of ~~September 30, 2022,~~March 31, 2023, we derived ~~83.6%~~84.8% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related items such as parking, storage, and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of ~~September 30, 2022,~~March 31, 2023, we derived ~~16.4%~~15.2% 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.

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

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

Three months ended September 30, 2022


Residential

Commercial

Total

(in thousands)
Lease income related to fixed lease payments

$
27,993

$
4,057

$
32,050
Lease income related to variable lease payments

—

1,113

1,113
Other (a)

(150)

113

(37)
Lease Income (b)

$
27,843

$
5,283

$
33,126


	Three months ended September 30, 2021						Three months ended March 31, 2023
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Lease income related to fixed lease payments	$	26,748	$	3,879	$	30,627	$	28,656	$	3,943	$	32,599
Lease income related to variable lease payments		—		1,130		1,130		—		1,197		1,197
Other (a)		(35)		174		139		(119)		96		(23)
Lease Income (b)	$	26,713	$	5,183	$	31,896	$	28,537	$	5,236	$	33,773

(a)

For the three months ended ~~September 30, 2022 and 2021,~~March 31, 2023, “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.

(b)

Excludes other rental income for the three months ended ~~September 30, 2022 and 2021~~March 31, 2023 of ~~$1,405 and $1,157, respectively,~~$1,407, which is accounted for under the revenue recognition standard.

2320

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

Nine months ended September 30, 2022


Residential

Commercial

Total

(in thousands)
Lease income related to fixed lease payments

$
81,928

$
12,240

$
94,168
Lease income related to variable lease payments

—

3,401

3,401
Other (a)

(513)

277

(236)
Lease Income (b)

$
81,415

$
15,918

$
97,333


	Nine months ended September 30, 2021						Three months ended March 31, 2022
	Residential		Commercial		Total		Residential		Commercial		Total

	(in thousands)						(in thousands)
Lease income related to fixed lease payments	$	76,722	$	12,531	$	89,253	$	26,498	$	4,067	$	30,565
Lease income related to variable lease payments		—		3,424		3,424		—		1,176		1,176
Other (c)		(212)		432		220		(169)		95		(74)
Lease Income (d)	$	76,510	$	16,387	$	92,897	$	26,329	$	5,338	$	31,667

~~(a)~~(c)

For the ~~nine~~three months ended ~~September 30,~~March 31, 2022, ~~and 2021,~~ “Other” is comprised of revenue adjustments related to changes in collectability and amortization of above and below market lease intangibles and lease inducements.

~~(b)~~(d)

Excludes other rental income for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 ~~and 2021~~ of ~~$3,931 and $3,839,~~$1,249, respectively, which is accounted for under the revenue recognition standard.

As of ~~September 30, 2022,~~March 31, 2023, non-cancelable commercial operating leases provide for future minimum rental income as follows. ~~Residential~~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)
2022 (October 1, 2022- December 31, 2022)	$	3,897
2023		15,738
2023 (April 1, 2023 - December 31, 2023)			$	11,818
2024		15,060		15,444
2025		14,789		15,020
2026		13,541		13,629
2027				12,200
Thereafter		57,397		44,335
	$	120,422	$	112,446

NOTE 12 – RELATED PARTY TRANSACTIONS

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

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

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

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

We have a historical and ongoing relationship with Bell Bank. Bell Bank has provided the Trust certain financial services throughout the relationship. Mr. Wieland, a Trustee, also serves as a Board Member of Bell Bank. Mr. Wieland could have an indirect material interest in any such engagement and related transactions.

The Trust has a historical and ongoing relationship with Trumont Group and Trumont Construction. Trumont Group provides development services for current joint venture projects in which the Operating Partnership is an investor. Trumont Construction has been engaged to construct the properties associated with these joint ventures. Mr. Regan, Chief Executive Officer and trustee, is a partner in both Trumont Group and Trumont Construction and has a direct material interest in any engagement or related transaction, the Trust enters into, with these entities.

Property Management ~~Fees~~Fee

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we paid ~~property management and administrative~~ fees to GOLDMARK Property Management, Inc. related to the management of ~~$10,485,~~properties, on-site staff costs and ~~$9,634,~~other miscellaneous fees required to run the property of $12,836 and $3,429, respectively. Management fees ~~which approximate~~paid during the year ended March 31, 2023 and 2022 approximated 5% of net collected ~~rents, account for $4,107 and $3,862 of these fees during the nine months ended September 30, 2022 and 2021.~~rents. In addition, during the ~~nine months~~year ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we paid repair and maintenance expenses, and payroll related expenses to GOLDMARK Property Management, Inc. totaling ~~$5,578~~$2,261 and ~~$5,012,~~$1,799, respectively.

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and ~~executive officers~~Executive Officers responsible for our management, we have no paid employees. The ~~Advisor may receive fees related to management~~following is a brief description of the ~~Trust, acquiring, disposing, or developing real estate property, project management~~current fees and ~~financing fees related to lending relationships,~~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, 2022,~~23, 2023 and is effective until March 31, ~~2023.~~

2024.

The below table summarizes the fees incurred to our Advisor.


	Nine Months ended September 30,				Three Months ended March 31,
	2022		2021		2023		2022

	(in thousands)				(in thousands)
Fee:
Advisory	$	2,739	$	2,474	$	955	$	898
Acquisition	$	934	$	375	$	-	$	358
Disposition	$	631	$	146	$	-	$	66
Financing	$	83	$	146	$	44	$	32
Project Management	$	420	$	409	$	195	$	206

2522

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

The below table summarizes the fees payable to our Advisor.


	Payable at				Payable at
	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022

	(in thousands)				(in thousands)
Fee:
Advisory	$	313	$	296	$	336	$	632
Acquisition	$	58	$	-	$	-	$	387
Development	$	-	$	79
Disposition	$	30	$	-	$	-	$	72
Financing	$	4	$	38	$	7	$	-
Project Management	$	3	$	98	$	12	$	12

Operating Partnership Units Issued in Connection with Acquisitions

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, there were no Operating Partnership units issued.

During the three months ended March 31, 2022, ~~510,000~~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 ~~$11,741.~~

~~During the nine months ended September 30, 2021, there were no Operating Partnership units issued directly or indirectly, to affiliated entities.~~$10,180.

Commissions

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, there were no real estate commissions paid to GOLDMARK Commercial Real Estate. During the three months ended March 31, 2022, ~~and 2021,~~ we incurred real estate commissions of ~~$371 and $297, respectively,~~$244 to GOLDMARK Commercial Real Estate, Inc., in which Messrs. Regan and Wieland jointly own a controlling interest. As of ~~September 30,~~March 31, 2023 and December 31, 2022, ~~total commissions payable to Goldmark Commercial Real Estate was $29. As of December 30, 2021,~~ there were no unpaid commissions to GOLDMARK Commercial Real Estate.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, there were no commission paid to GOLDMARK Property Management. During the three months ended March 31, 2022, ~~and 2021,~~ we incurred real estate commissions of ~~$319 and $217, respectively,~~$163, to GOLDMARK Property Management. As of ~~September 30,~~March 31, 2023 and December 31, 2022, ~~total commissions payable to Goldmark Property Management was $59. As of December 30, 2021,~~ there were no unpaid commissions to GOLDMARK ~~Property Management.~~Commercial Real Estate.

Rental Income

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we received rental income of ~~$97~~$67 and ~~$77,~~$66, respectively, under an operating lease agreement with GOLDMARK Property Management, Inc.

During the three months ended March 31, 2023 and 2022, we received rental income of $33 and $32, respectively, under operating lease agreements with our Advisor.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we received rental income of $-$225 and ~~$19,~~$209, respectively, under an operating lease agreement ~~with GOLDMARK Commercial Real Estate, Inc.~~

~~During the nine months ended September 30, 2022 and 2021, we received rental income of $200 and $224, respectively, under operating lease agreements with GOLDMARK Property Management, Inc.~~

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

~~During the nine months ended September 30, 2022 and 2021, we received rental income of $639 and $278, respectively, under operating lease agreements~~ with Bell Bank.

Other operational ~~costs~~activity

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Trust incurred ~~$420~~$33 and ~~$187,~~$206, respectively, for general costs related to business operations as well as capital expenditures related to construction in progress that were paid to related parties. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, operational outstanding liabilities were $3$32 and ~~$-,~~$168, respectively.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

~~Other operational receipts~~

~~At September 30, 2022 and December 31, 2021, operational outstanding receivables from related parties were $42 and $128, respectively.~~

Debt Financing

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Trust had ~~$64,691~~$63,543 and ~~$66,365,~~$64,123, respectively, of outstanding principal on loans entered into with Bell Bank. During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Trust incurred interest expense on debt held with Bell Bank of ~~$491~~$620 and ~~$1,511,~~$618, respectively. Accrued interest as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, related to this debt was ~~$125~~$141 and ~~$148,~~$130, respectively.

At March 31, 2023, the Trust did not have an outstanding principal on a note payable entered into with Bell Bank. At December 31, 2022, the Trust had $26,500 of outstanding principal on a note payable entered into with Bell Bank. During the three months ended March 31, 2023, the Trust incurred interest expense on a note payable held with Bell Bank of $72. During the three months ended March 31, 2022, the Trust did not incur interest expense on a note payable held with Bell Bank.

Mezzanine Financing

The trust offers mezzanine financing to joint ventures, see note 5 for investment in unconsolidated affiliates. At March 31, 2023 and December 31, 2022, Sterling issued $9,338 and $5,854 respectively, in second mortgage financing to related entries.

During the three months ended March 31, 2023 and 2022, the trust earned interest income of $147 and $140 respectively, related to the second mortgage financing.

Insurance Services

The trust retains insurance services from Bell Insurance. Policies provided by these services provide insurance coverage for the Trust’s Commercial segment as well as Director and Officer general and liability coverage. For the three months ended March 31, 2023, total premiums incurred for this policy were $84. No premiums were incurred during the three months ended March 31, 2022.

Development Arrangements

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, no development fees were paid. During the three months ended March 31, 2022 ~~and 2021,~~ the ~~Trust~~trust incurred ~~$717 and $51, respectively,~~$153 in development fees to Trumont Group. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Trust had no costs owed ~~$103 and $51, respectively,~~ for development fees to Trumont Group.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Trust incurred ~~$734~~$113 and ~~$12,~~$96 respectively, in construction fees to Trumont Construction. At ~~September 30, 2022 and~~March 31, 2023, no construction fees costs were owed. At December 31, ~~2021,~~2022, the Trust owed ~~$94 and $29, respectively~~$71 for construction fees to Trumont Construction.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, and 2022 ~~and 2021,~~ the Trust incurred ~~$284~~$95 and ~~$41,~~$118 respectively, in general construction costs to Trumont Construction. At ~~September 30, 2022 and~~March 31, 2023, no general construction costs were owed. At December 31, ~~2021,~~2022, the Trust owed ~~$49 and $-, respectively,~~$81 for general construction ~~costs.~~costs to Trumont Construction.

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023 and 2022 (UNAUDITED)

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

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

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

~~Table of Contents~~

~~STERLING REAL ESTATE TRUST AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022 and 2021~~ ~~(UNAUDITED)~~

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

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

Risk of Uninsured Property Losses

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

Litigation

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

NOTE 14 – DISPOSITIONS

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, the Trust did not dispose of any properties. During the three months ended March 31, 2022 the ~~Operating Partnership~~Trust disposed of ~~four~~ ~~properties.~~ ~~One~~one property located in Savage, Minnesota, ~~was disposed of~~ for $2,700 ~~with~~and recognized a ~~recognized~~ gain of $1,328.

~~One~~ property located in Moorhead, Minnesota was disposed of for $6,400 with a recognized gain of $2,012. One property located in Edina, Minnesota was disposed of for $15,320 with a recognized gain of $6,728. The other property located in East Grand Forks, MN was disposed of for $1,200 with a recognized loss of $171. During the nine months ended September 30, 2021, the Operating Partnership disposed of two properties for a total of $5,850 and recognized gain of $1,710.

NOTE 15 – ACQUISITIONS

The Trust had ~~six~~no acquisitions during the ~~nine~~three months ended ~~September 30,~~March 31, 2023.

The Trust had one acquisition during the three months ended March 31, 2022.

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Total Acquisition Cost

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Purchase Price

2/28/22

Deer Park

Hutchinson, MN

Apartment Complex

138 units

15,073

Deer Park

Hutchinson, MN

Apartment Complex

138 units

15,073

5/31/22

Desoto Estates

Grand Forks, ND

Apartment Complex

68 units

5,863

5/31/22

Desoto Townhomes

Grand Forks, ND

Townhomes

24 units

3,226

5/31/22

Desoto Apartments

East Grand Forks, MN

Apartment Complex

24 units

1,230

6/10/22

Diamond Bend

Mandan, ND

Apartment Complex

78 units

10,919

9/13/22

Newgate Apartments

Bismarck, ND

Apartment Complex

46 units

2,444

38,755

15,073

Total consideration given for acquisitions through September 30, 2022 was completed through issuing approximately 539,000 limited partnership units of the Operating Partnership valued at $23.00 per unit for an aggregate consideration of approximately $12,390. 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. In 2022, cash flows were reclassified to updated presentation resulting prior period to be updated to align with reclassification. The following table summarizes the acquisition date fair values, before pro-rations, the Company recorded in conjunction with the acquisitions discussed above:

2825

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2022~~March 31, 2023 and ~~2021~~2022 (UNAUDITED)

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

Total consideration given for acquisitions through March 31, 2022 was completed through issuing approximately 443,000 limited partnership units of the Operating Partnership valued at $23 per unit for an aggregate consideration of approximately $10,180, and cash of $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. The following table summarizes the acquisition date fair values, before pro-rations, the Company recorded in conjunction with the acquisition discussed above:


	Nine months ended				Year Ended
	September 30,				March 31,
	2022		2021		2023		2022
Real estate investment acquired	$	38,296	$	39,344	$	-	$	14,831
Acquired lease intangible assets		749		-		-		260
Assumed Assets		3		23		-		2
Total Assets Acquired	$	39,048	$	39,367	$	-	$	15,093
Other liabilities		(293)		(569)		-		(20)
Net assets acquired		38,755		38,798		-		15,073
Equity/limited partnership unit consideration		(12,390)		(2,883)		-		(10,180)
Net cash consideration	$	26,365	$	35,915	$	-	$	4,893

NOTE 16 - SUBSEQUENT EVENTS

On ~~October~~April 3, 2023, the Trust paid off a retail mortgage totaling $496. The property is unencumbered as of April 3, 2023.

On April 17, ~~2022,~~2023, we paid a dividend or distribution of $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 ~~September 30, 2022.~~March 31, 2023.

~~As of September, 2022, we had certain acquisitions and dispositions in process.~~ On May 5, 2023, the Trust paid off a residential mortgage totaling $3,185.

On May 5, 2023, the Trust obtained financing on a residential property for $5,000.

Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.

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

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

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

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

Certain statements contained in this section and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. ~~Such factors include but are not limited to: (i) trends affecting our financial condition or results of operations; (ii) our business~~Please 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”,~~Sterling,” “the ~~Trust”~~“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, 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 ~~184~~185 properties containing ~~11,018~~11,300 apartment units and approximately ~~1,512,000~~1,498,000 square feet of leasable commercial space as of ~~September 30, 2022~~March 31, 2023. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately ~~$730,643,~~$772,682, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.

Critical Accounting Estimates

Below are accounting policies and estimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report. Certain accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see ~~Note~~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.

~~Table of Contents~~

Impairment of Real Estate Investments

The ~~Trust’s investment properties are reviewed~~Trust 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 ~~end~~property 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 or whenever events or changes in circumstances indicate~~activities 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:

o●

~~a substantial decline or negative cash flows;~~An individual property’s weighted average cost of capital is not meeting its required rate as calculated by management.

o●

~~continued low occupancy rates;~~Significant decline in Operational NOI in relation to individual residential properties.

o●

~~continued difficulty~~Significant decline in ~~leasing space;~~NOI in relation to individual commercial properties.

o●

~~significant financially troubled tenants;~~

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

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

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

If the presence of one or more impairment ~~indicators as described above~~identifier is ~~identified~~noted 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 value~~further analyzed to determine if an indicator of impairment exists. If further analysis does not explain the ~~estimated future~~properties performance, the Trust considers this to

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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 property~~flow analysis is ~~considered to be impaired when~~performed on the ~~estimated future undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair value~~individual property. Indicators of ~~an impaired investment property, the Trust makes complex or subjective assumptions which include, but are not limited to:~~impairment include:

o●

~~projected operating~~Sustained reduction in cash ~~flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period~~flows/NOI that was not due to a planned action taken by the Company to improve long term operations and where discussion and review with the Portfolio management team cannot support a significant decline or insufficient NOI Coverage.

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 ~~location;~~or renewing existing leases. Factors considered include:

o◾

~~projected capital expenditures;~~Competitors building significantly newer properties.

o◾

~~projected cash flows from~~Competitors are relocating out of the ~~eventual disposition of an operating property using a property specific capitalization rate;~~area.

o◾

~~comparable selling prices;~~Tenant downsizing and needing less square footage.

o◾

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 ~~specific discount rates~~approved by the Board of Trustees to be sold, will be evaluated for ~~fair value estimates as necessary.~~impairment.

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.~~value for impairment of investment properties. Based on evaluation, there were no impairment losses during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 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.

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Principal Business Activity

Sterling currently directly owns ~~directly and indirectly 184~~185 properties. The Trust’s ~~141~~143 residential properties are located in North Dakota, Minnesota, Missouri, Nebraska, and ~~Nebraska~~Texas and are principally multifamily apartment buildings. The Trust owns 4342 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, and Wisconsin. The commercial properties include retail, office, industrial, ~~restaurant~~ and medical properties. ~~Presently, the~~The Trust’s mix of properties is ~~77.4%~~78.8% residential and ~~22.6%~~21.2% commercial (based on cost) ~~and~~with a total ~~$730,643 in real estate investments~~carrying value of $772,682 at ~~September 30, 2022. Sterling’s current acquisition strategy and primary~~March 31, 2023. Currently our focus is onlimited to multifamily apartment properties. ~~We currently have no plans to actively market our existing commercial properties for sale.~~ We will consider unsolicited offers for purchase of ~~non-multifamily~~commercial properties on a case-by-case basis.

Residential Property

Location

No. of Properties

Units

North Dakota

121

7,175

Minnesota

15

3,040

Missouri

1

164

Nebraska

4

639

141

11,018

Commercial Property

Location

No. of Properties

Sq. Ft

North Dakota

20

780,000

Arkansas

2

28,000

Colorado

1

17,000

Iowa

1

33,000

Louisiana

1

15,000

Michigan

1

12,000

Minnesota

10

530,000

Mississippi

1

15,000

Nebraska

1

19,000

Wisconsin

5

63,000

43

1,512,000

The following table represents the number of properties the Trust owns in each state as of March 31, 2023


Residential Property	Location	No. of Properties	Units
	North Dakota	122	7,187
	Minnesota	15	3,040
	Missouri	1	164
	Nebraska	4	639
	Texas	1	270
		143	11,300

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	9	524,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		42	1,498,000

Results of Operations

Management Highlights

●

Increased revenues from rental operations by ~~$1,478~~$2,264 or ~~4.5%~~6.9% for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to the same three ~~month period~~month-period in ~~2021.~~

●

~~Increased revenues from rental operations by $4,528 or 4.7% for the nine months ended September 30, 2022, compared to same nine month period in 2021.~~

●

~~Acquired six residential properties during the nine months ended September 30, 2022.~~

●

~~Disposed of two residential and two commercial properties during the nine months ended September 30,~~ 2022.

●

Declared and paid dividends aggregating ~~$0.8625~~$0.2875 per common share for the ~~nine~~three months ~~ended September 30, 2022~~ending March 31, 2023.

~~Table of Contents~~29

~~Results of Operations for the Three Months Ended September 30, 2022 and 2021~~

Three months ended September 30, 2022

Three months ended September 30, 2021


Residential

Commercial

Total

Residential

Commercial

Total

(unaudited)

(unaudited)


(in thousands)

(in thousands)
Real Estate Revenues

$
29,226

$
5,305

$
34,531

$
27,838

$
5,215

$
33,053
Real Estate Expenses

Real Estate Taxes

2,955

610

3,565

2,743

746

3,489
Property Management

3,482

241

3,723

3,419

540

3,959
Utilities

2,241

364

2,605

1,990

350

2,340
Repairs and Maintenance

6,512

479

6,991

6,375

654

7,029
Insurance

1,021

23

1,044

825

31

856
Total Real Estate Expenses

16,211

1,717

17,928

15,352

2,321

17,673
Net Operating Income

$
13,015

$
3,588

16,603

$
12,486

$
2,894

15,380
Interest

5,081

4,671
Depreciation and amortization

6,120

5,551
Administration of REIT

1,471

1,007
Other income

(6,385)

(1,567)
Net Income

$
10,316

$
5,718

Net Income Attributed to:

Noncontrolling Interest

$
6,548

$
3,614
Sterling Real Estate Trust

$
3,768

$
2,104
Dividends per share⁽¹⁾

$
0.2650

$
0.2647
Earnings per share

$
0.35

$
0.21
Weighted average number of common shares

10,685

10,215

~~(1)~~

~~Does not take into consideration the amounts distributed by the Operating Partnership to limited partners.~~

~~Revenues~~

Property revenues of $34,531 for the three months ended September 30, 2022 increased $1,478 or 4.5% in comparison to the same period in 2021. Residential property revenues increased $1,388 and commercial property revenues increased $90.

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

September 30,

September 30,

2022

2021

Residential occupancy

93.4
%
94.4
%
Commercial occupancy

88.4
%
78.2
%

Residential revenues for the three months ended September 30, 2022 increased $1,388 or 5.0% in comparison to the same period for 2021. Residential properties acquired since January 1, 2021 contributed approximately $1,007 to the increase in total residential revenues in the three months ended September 30, 2022. The increase is also attributed to a $186 increase in Ratio Utility Billing Systems (RUBS) for total residential revenues in the three months ended September 30, 2022. The increase in RUBS revenue is partially offset by an increase in utility expense, as noted below. Residential revenues comprised 84.6% of total revenues for the three months ended September 30, 2022 compared to 84.2% of total revenues for the three months ended September 30, 2021.

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For the three months ended September 30, 2022 total commercial revenues increased $90 or 1.7% in comparison to the same period for 2021. The increase is primarily attributed to full occupancy at an office park located in Fargo, ND, partially offset by the dispositions of two commercial properties. Commercial revenues comprised 15.4% of the total revenues for the three months ended September 30, 2022 compared to 15.8% of total revenues for the three months ended September 30, 2021.

~~Expenses~~

Residential expenses from operations of $16,211 during the three months ended September 30, 2022 increased $859 or 5.6% in comparison to the same period in 2021. The increase is primarily attributed to a $196 or 23.8% increase in property insurance, as well as an increase in real estate taxes of $212 or 7.7%, and utility expense of $251 or 12.6%. These increases are primarily attributed to properties acquired after January 2021. Properties acquired after January 1, 2021, account for $137 of the property management fees increase during the three months ended September 30, 2022.

Commercial expenses from operations of $1,717 during the three months ended September 30, 2022 decreased $604 or 26.0% in comparison to the same period in 2021. The decrease is primarily attributed to decreased property management expense of $299 or 55.4% for an office building located in Minneapolis, MN in which increased advertising and marketing expenses were incurred during 2021 in an effort to lease up vacant space. The decrease is also attributable to a decrease in real estate taxes of $134 or 61.8% and a decrease to repairs and maintenance expense of $175 or 26.8%.

Interest expense of $5,081 during the three months ended September 30, 2022 increased $410 or 8.8% in comparison to the same period in 2021. Interest expense related to financing activities increased by $393 during the three months ended September 30, 2022 as compared to the same period in 2021. The primary reason for increased interest expense on debt is due to increased mortgage balance on the portfolio as a whole. During the three months ended September 30, 2022 interest expense was 14.7% of total revenues.

Depreciation and amortization expense of $6,120 during the three months ended September 30, 2022 increased $569 or 10.3% in comparison to the same period in 2021. Properties acquired since January 1, 2021 contributed approximately $482 to the increase in depreciation expense during the three months ended September 30, 2022. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the three months ended September 30, 2022 and 2021 was 17.7% and 16.8%, respectively.

~~REIT administration expenses of $1,471 during the three months ended September 30, 2022 increased $464 or 46.1% in comparison to the same period in 2021, due to an increase of REIT advisory fees paid.~~

Other income of $6,386 during the three months ended September 30, 2022 increased $4,819 or 307.5% in comparison to the same period in 2021. This is primarily attributable to an increase in realized gains on sale of real estate investments of $6,557 as compared to 2021, partially offset by a decrease in settlement proceeds for $985 or 98.50% compared to the same period in 2021.

~~Table of Contents~~

Results of Operations for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022


	Nine months ended September 30, 2022						Nine months ended September 30, 2021						Three months ended March 31, 2023						Three months ended March 31, 2022
	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	$	85,222	$	16,042	$	101,264	$	80,028	$	16,708	$	96,736	$	29,920	$	5,260	$	35,180	$	27,494	$	5,422	$	32,916
Real Estate Expenses
Real Estate Taxes		8,765		1,935		10,700		8,025		2,098		10,123		3,239		560		3,799		2,846		651		3,497
Property Management		10,430		598		11,028		9,709		1,043		10,752		3,875		205		4,080		3,443		203		3,646
Utilities		8,215		982		9,197		6,648		809		7,457		3,886		326		4,212		3,409		360		3,769
Repairs and Maintenance		17,800		1,347		19,147		15,819		1,478		17,297		8,161		604		8,765		5,974		433		6,407
Insurance		2,754		83		2,837		2,363		87		2,450		1,042		23		1,065		836		31		867
Total Real Estate Expenses		47,964		4,945		52,909		42,564		5,515		48,079		20,203		1,718		21,921		16,508		1,678		18,186
Net Operating Income	$	37,258	$	11,097		48,355	$	37,464	$	11,193		48,657	$	9,717	$	3,542		13,259	$	10,986	$	3,744		14,730
Interest						14,882						13,261						5,355						4,845
Depreciation and amortization						17,865						16,634						6,552						5,782
Administration of REIT						4,087						3,267						1,311						1,217
Other income						(9,291)						(4,337)						729						(503)
Net Income					$	20,812					$	19,832
Net (loss) Income																	$	(688)					$	3,389

Net Income Attributed to:
Net (Loss) Income Attributed to:
Noncontrolling Interest					$	13,262					$	12,713					$	(448)					$	2,175
Sterling Real Estate Trust					$	7,550					$	7,119					$	(240)					$	1,214
Dividends per share⁽¹⁾					$	0.5750					$	0.5300					$	0.2875					$	0.2875
Earnings per share					$	0.7100					$	0.7100					$	(0.0200)					$	0.1200
Weighted average number of common shares						10,572						10,095						10,952						10,465

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

Revenues

Property revenues of ~~$101,264~~$35,180 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 increased ~~$4,528~~$2,264 or ~~4.7%~~6.9% in comparison to the same period in ~~2021.~~2022. Residential property revenues increased ~~$5,194~~$2,426 and commercial property revenues decreased ~~$666, from the prior year’s comparable nine month period.~~$162.

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

September 30,

September 30,

2022

2021

Residential occupancy

94.4
%
94.1
%
Commercial occupancy

88.4
%
78.2
%

Residential revenues for the nine months ended September 30, 2022 increased $5,194 or 6.5% in comparison to the same period for 2021. Residential properties acquired since January 1, 2021 contributed approximately $4,176 to the increase in total residential revenues in the nine months ended September 30, 2022. Increased lease renewals, resulting in decreased rental incentives contributed to the rental income increase, as well as increased rent charges at the stabilized properties. Residential revenues comprised 84.2% of total revenues for the nine months ended September 30, 2022 compared to 82.7% of total revenues for the nine months ended September 30, 2021

For the nine months ended September 30, 2022, total commercial revenues decreased $666 or 4.0% in comparison to the same period for 2021. The decrease is attributed to the sale of commercial building for resulting in a $512 decrease in revenue. The decrease is also attributed to an early termination fee of $173. Commercial revenues comprised 15.8% of the total revenues for the nine months ended September 30, 2022 compared to 17.3% of total revenues for the nine months ended September 30, 2021.


	March 31,		March 31,
	2023		2022
Residential occupancy	90.4	%	94.1	%
Commercial occupancy	88.4	%	74.8	%

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Residential revenues for the three months ended March 31, 2023 increased $2,426 or 8.8% in comparison to the same period for 2022. Residential properties acquired since January 1, 2022 contributed approximately $1,902 to the increase in total residential revenues for the three months ended March 31, 2023. The remaining increase is due to increased rent charges at our stabilized properties. Residential revenues comprised 85.0% of total revenues for the three months ended March 31, 2023 compared to 83.5% of total revenues for the three months ended March 31, 2022. The residential occupancy rates for the three months ended March 31, 2023 decreased 3.7% primarily due to increased vacancy.

For the three months ended March 31, 2023, total commercial revenues decreased $162 or 3.0% in comparison to the same period for 2022. The decrease was primarily attributed to the disposition of one commercial real estate investment in 2022. This property accounts for $33 of decreased commercial rent during the three months ended March 31, 2023. Increased vacancy in the Minneapolis market accounts for $35 of decreased commercial revenue, along with a decrease in total miscellaneous income for $59. This is attributed to an early term fee in the Minneapolis Market in 2022. The commercial occupancy rates for the three months ended March 31, 2023 decreased 17.1% primarily due to office spaces located in the Minnesota market.

Expenses

Residential expenses from operations of ~~$47,964~~$20,203 during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 increased ~~$5,400~~$3,695 or ~~12.7%~~22.4% in comparison to the same period in ~~2021.~~2022. The increase is ~~primarily~~ attributed to ~~increased~~an increase in repairs and maintenance expense of ~~$1,981~~$2,187 or ~~12.5%, included in that is an increase in snow removal for $434.~~36.6%. Properties acquired since January 1, ~~2021 contributed $409~~2022 attributed $287 to the ~~overall~~ increase in repairs and ~~maintenance.~~maintenance expense. Additionally, increased project and upgrade costs, which are considered to be deferred maintenance costs from the year ended 2020 and 2021, due to COVID-19 restrictions attribute to the increase in repairs and maintenance expense during the three months ended March 31, 2023. The increase is also attributed to ~~increased real estate taxes of $740 or 9.2%. Further, the~~an increase ~~is attributed to increased~~in utility expense of ~~$1,567~~$477 or ~~23.6%, mainly~~14.0% as well as an increase in property management expense of $430 or 12.5%. The main reason for the ~~Minneapolis, Minnesota~~increases in utility and ~~Fargo, North Dakota market.~~property management expenses is related to the properties acquired since January 1, 2022, which account for $204 and $275 of the increase, respectively.

Commercial expenses from operations of ~~$4,945~~$1,718 during the ~~nine~~three months ended ~~September 30, 2022 decreased $570~~March 31, 2023 increased $40 or ~~10.3%~~2.4% in comparison to the same period in ~~2021. During~~2022. The increase in overall expenses is attributed to repairs and maintenance expenses during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 Repairs and maintenance increased by $171 in comparison to the same period in 2022, This attributes to high costs in HVAC repairs and higher snow removal costs. These costs are offset by a decrease in utilities and property ~~management fees decreased by $445 or 42.7%. This was related~~tax for $125 for the three months ended March 31, 2023 in comparison to ~~increased advertising and marketing expenses incurred~~the same period in ~~2021 for an office building located in Minneapolis, Minnesota in efforts to lease up vacant space.~~2022.

Interest expense of ~~$14,882~~$5,355 during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 increased ~~$1,621~~$510 or ~~12.2%~~10.5% in comparison to the same period in ~~2021~~2022. Interest ~~expense~~expenses related to financing activities increased by ~~$1,429~~$405 during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 as compared to the same period in ~~2021. The primary reason for~~2022. Interest expense notes payable increased $72 during the ~~increase in interest expense related to debt is~~three months ended March 31, 2023 due to the ~~increase of mortgage principle~~payoff of the ~~Trust’s debt portfolio. Capitalized interest expense related to construction in progress decreased $127 during~~Bell Bank promissory note acquired at the ~~nine~~end of 2022. During the three months ended ~~September 30, 2022, compared to the same period in 2021. During the nine months ended September 30, 2022,~~March 31, 2023 interest expense was ~~14.7%~~15.2% of total ~~revenues~~revenues.

Depreciation and amortization expense of ~~$17,865 for~~$6,552 during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 increased ~~$1,231~~$770 or ~~7.4% in comparison to the same period in 2021.~~13.3%. Properties acquired since January 1, ~~2021,~~2022, contributed approximately ~~$1,368~~$598 to the increase in depreciation expense. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of rental income for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 was 18.6% and ~~2021 was relatively consistent at~~ 17.6% ~~and 17.2%~~, respectively.

REIT administration expenses of ~~$4,087~~$1,311 during the three months ended March 31, 2023 increased $94 or 7.7% compared to the same period in 2022. The increase is attributable to an increase in the amount of audit fees and the REIT advisory fee.

Other (loss) income of $(728) for the ~~nine~~three months ended ~~September 30, 2022 increased $820~~March 31, 2023 decreased $1,232 or ~~25.1%~~245.0% in comparison to the same period in ~~2021.~~2022. The ~~increase is attributed to an increase of REIT advisory fees paid during the year 2022 as compared to 2021.~~

~~Other income of $9,291 for the nine months ended September 30, 2022 increased $4,954 or 114.2% in comparison to the same period in 2021. The increase~~decrease is attributed to realized gains on ~~sale of $8,187 as compared to prior year for~~ the sale of ~~four properties. This is offset by the decrease~~real estate investments of $1,329 in ~~gain from involuntary conversion of $633 and a decrease in equity in affiliates of $1,740, caused by depreciation expense related to two developments being put into service.~~2022.

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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 ~~September 30, 2022,~~March 31, 2023, consists primarily of construction at several residential properties located in North Dakota and Minnesota. The Prairiewood Meadows ~~located in Fargo, North Dakota~~construction consists of the re-development of one building due to a fire, ~~and a water main break, and includes~~ a new ~~club house~~clubhouse for residents, and parking lot ~~additions and repairs and replacement of windows and patio doors on the other two buildings.~~repairs. The re-development of one building ~~is substantially complete~~due to a fire was completed in the first quarter of 2023, and ~~is pending final invoices to be received. The~~current expectations for the clubhouse and parking lot ~~and clubhouse~~ will ~~remain~~be completed in ~~construction phase throughout~~ the ~~fourth~~second quarter of ~~2022.~~2023. The current budget ~~for this property~~ is ~~$4,271~~approximately $1,200 of which ~~$3,322~~$704 has been incurred and ~~accrued for~~is included in construction in progress. ~~Georgetown-on-the-River, located in Minneapolis, had~~The Rosedale Estates project is primarily related to a ~~fire occur in early January 2022 that caused significant damage to~~new parking structure. Current expectations are the ~~property. Repairs to the damaged units, that are being tracked in construction-in-progress, now totals $284 with expected completion~~project will be completed in the ~~fourth~~first quarter of ~~2022 pending final inspections. Rosedale Estates, located in Roseville, MN will be creating a parking structure in 2023. The~~2024, and the current

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budget is ~~$5,142~~approximately $5,189 of which $256 has been incurred and is included in ~~the beginning stages of engineering.~~construction in progress. Remaining construction in progress projects are primarily related to ~~parking lot~~building and roof system, roof replacements ~~roof upgrades, and various property upgrades~~ on multiple residential properties, residential exterior window systems, and new deck systems on multiple residential properties.

The Trust has two on-going developments through ventures in unconsolidated affiliates.

Park Hill Apartments, currently being developed in Dallas, Texas, is expected to be completed in the third quarter of 2023 and the current project budget approximates $53,138 of which $42,755 has been incurred as of March 31, 2023.

Kessler Apartments, currently being developed in Fort Worth, Texas, is expected to be completed in the third quarter of 2024 and the current project budget approximates $55,000 of which $18,357 has been incurred as March 31, 2023.

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.

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.

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

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The following tables include calculations of FFO and the reconciliations to net income, ~~for~~ the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. We believe these calculations are the most comparable GAAP financial ~~measure (in thousands):~~measure:

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

Three months ended September 30, 2022

Three months ended September 30, 2021

Weighted Avg

Weighted Avg

Shares and

Shares and


Amount

Units

Amount

Units

(unaudited)

(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust

$
3,768

10,685

$
2,104

10,215

Add back:

Noncontrolling Interest - Operating Partnership Units

6,601

18,651

3,753

18,256
Depreciation & Amortization from continuing operations

6,120

5,550

Pro rata share of unconsolidated affiliate depreciation and amortization

782

207

Subtract:

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

(6,557)

—

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

$
10,714

29,336

$
11,614

28,471


	Nine months ended September 30, 2022			Nine months ended September 30, 2021			Three months ended March 31, 2023			Three months ended March 31, 2022
			Weighted Avg			Weighted Avg			Weighted Avg			Weighted Avg
			Shares and			Shares and			Shares and			Shares and
	Amount		Units	Amount		Units	Amount		Units	Amount		Units

	(unaudited)						(unaudited)
	(in thousands, except per share data)						(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	7,550	10,572	$	7,119	10,095
Net (Loss) Income attributable to Sterling Real Estate Trust							$	(240)	10,952	$	1,214	10,465

Add back:
Noncontrolling Interest - Operating Partnership Units		13,277	18,594		12,862	18,236		(408)	18,696		2,145	18,495
Depreciation & Amortization from continuing operations		17,865			16,634			6,552			5,782
Pro rata share of unconsolidated affiliate depreciation and amortization		2,514			499			1,484			1,089
Loss on impairment of real estate investments								—			—
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		(9,897)			(1,710)
Gain on sale of depreciable real estate								—			(1,329)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	31,309	29,166	$	35,404	28,331	$	7,388	29,648	$	8,901	28,960

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 ~~expirations.~~terms and projected expiration dates.

Our principal demands for funds will be for the: (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions, (iv) payment of principal and interest on current and any future outstanding indebtedness, (v) redemptions of our securities under our redemption plans and (vi) capital improvements, development projects, and property related expenditures. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from cash flow from operations. We expect to pay dividends/distributions and any repurchase requests to our shareholders and the unit holders of our Operating Partnership from cash flow from operations; however, we may use other sources to fund dividends/distributions and repurchases, as necessary.

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~~As of September 30, 2022,~~At March 31, 2023, our unrestricted cash resources consisted of cash and cash equivalents totaling ~~$20,464.~~approximately $12,064. Our unrestricted cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of ~~$50,972,~~$51,888, which could potentially be used as collateral to secure additional financing in future periods.

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~~We have~~The Trust has a $4,915 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires in December 2026; and a $5,000 variable rate (floating SOFR plus 2.00%) line of credit agreement with Bremer Bank, which expires December 2026. The lines of credit are secured by specific properties. At ~~September 30, 2022,~~March 31, 2023, the Bremer ~~line~~lines of credit ~~secures one letter~~secured two letters of credit totaling $50, leaving $9,865 available and unused under the agreements. These operating lines are designed to enhance treasury management activities and more effectively manage cash balances. There were no balances outstanding on either line as of September 30, 2022 or December 31, 2021.

The Trust ~~also has~~anticipates it will hold it as a line of credit secured by our Treasury Bill purchases. This variable rate (WSJ Prime minus 1.00%) line of credit allows for the borrowing of up to $20,000 or 90% of the investment value, whichever is less. This line of credit expires in September 2023 and provides liquiditycash resource to the ~~Trust if needed by drawing against our Treasury investments. There was no balance outstanding on this line as of September 30, 2022.~~

~~Certain lines of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.~~Trust.

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 the Trust.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, we did not sell any common shares in private placements. During the three months ended March 31, 2023, we issued 90,000 and 56,000 common shares under the dividend reinvestment plan and optional share purchases, respectively, which raised gross proceeds of $3,253. During the three months ended March 31, 2022, we did not sell any common shares in a private ~~placement.~~placements. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, we issued ~~252,000~~79,000 and ~~133,000~~57,000 common shares ~~for $8,561~~ under the dividend reinvestment plan ~~through dividends reinvested~~ and ~~the~~as optional share purchases. During the nine months ended September 30, 2022, we did not sell any common shares in a private placement. During the nine months ended September 30, 2021, we issued 269,000 and 150,000 common shares for $8,121, under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively.purchases, respectively, which raised gross proceeds of $3,029.

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. No limited partnership units of the Operating Partnership were issued in relation to the acquisition of real estate investments the three months ended March 31, 2023. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, the Trust issued ~~539,000~~approximately 443,000 limited partnership units of the Operating Partnership valued at $23.00 per unit for an aggregate consideration of approximately $12,390 for the purchase of real estate investments. During the nine months ended September 30, 2021, the Trust issued 144,000 limited partnership units of the Operating Partnership valued at $20.00 per unit for an aggregate consideration of approximately $2,883$10,180 for the purchase of real estate investments.

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 knowledge 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 guide 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 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. 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.

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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.

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 will use cash flows from operations, net proceeds from share offerings, debt proceeds, and proceeds from the disposition of real estate investments to meet long term liquidity demands.

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Credit Quality of Tenants

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

To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenants’ operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our ~~properties’~~property’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 our~~Our residential leases are for a term of one year or less. 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~~.property.

Cash Flow Analysis

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


	Nine months ended				Three months ended
	September 30,				March 31,
	2022		2021		2023		2022

	(in thousands)				(in thousands)
Net cash flows provided by operating activities	$	28,757	$	32,840	$	4,474	$	7,457
Net cash flows used in investing activities	$	(63,078)	$	(49,112)
Net cash flows provided by financing activities	$	3,396	$	21,684
Net cash flows provided by (used in) investing activities					$	14,644	$	(10,187)
Net cash flows (used in) provided by financing activities					$	(10,389)	$	3,567

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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 ~~costs,~~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 ~~$28,757~~$4,474 and ~~$32,840 for~~$7,457 the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization.

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Investing Activities

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

Net cash provided by investing activities was $14,644 and used in investing activities was ~~$63,078 and $49,112~~$10,187 for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ cash flows used in investing activities related ~~specifically~~ to the acquisition of properties and capital expenditures was ~~$34,616~~$1,782 and ~~$49,522,~~$7,295, respectively. ~~For~~Cash outlays related to investments in unconsolidated affiliates was $2,261 and $6,444 during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, cash flows used in investing activities related to U.S. Treasury bill purchase was $42,000 and $-,~~ respectively. ~~Proceeds of $1,049 and $4,095 were received from involuntary conversions during~~During the ~~nine~~three months ended ~~September 30, 2022 and 2021. In addition,~~March 31, 2023, there were proceeds ~~of $22,429 and $5,590 were generated~~ from the ~~sales~~maturity of securities for $19,369. There were no proceeds from the maturity of securities for the three months ended March 31, 2022. During the three months ended March 31, 2023, there were no proceeds from the sale of real estate investments. Proceeds from sale of real estate investments during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 ~~and 2021. For the nine months ended September 30, 2022 and 2021, cash flows used for investment in unconsolidated affiliates~~ was ~~$10,068 and $5,845 respectively.~~$2,622.

Financing Activities

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

Net cash used in financing activities was $10,389 and provided by financing activities was ~~$3,396for~~$3,567 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we paid ~~$18,824~~$6,531 in dividends and distributions, redeemed ~~$1,863~~$1,096 of shares and units, received ~~$37,569~~proceeds of $30,250 from new mortgage notes, ~~payable,~~ and made mortgage principal payments of ~~$16,239. Net cash used in financing activities was $21,684 for~~$6,637. For the ~~nine~~three months ended ~~September 30, 2021. For the nine months ended September 30, 2021,~~March 31, 2022, we paid ~~$17,309~~$5,851 in dividends and distributions, redeemed ~~$4,465~~$736 of shares and units, received ~~$71,530~~proceeds of $12,867 from new mortgage notes, ~~payable,~~ and made mortgage principal payments of ~~$30,360.~~$3,931.

Dividends and Distributions

Common Stock

We declared cash dividends to our shareholders during the period from January 1, ~~2022~~2023 to ~~September 30, 2022~~March 31, 2023 totaling ~~$9,114~~$3,147 or ~~$0.8625~~$0.2875 per share, of which ~~$3,353~~$1,151 were cash dividends and ~~$5,760~~$1,996 were reinvested ~~through~~under the dividend reinvestment plan. The cash dividends were paid ~~with~~from the ~~$28,757~~$4,474 from our cash flows from operations.

We declared cash dividends to our shareholders during the period from January 1, ~~2021~~2022 to ~~September 30, 2021~~March 31, 2022 totaling ~~$8,020~~$3,007 or ~~$0.7950~~$0.2875 per share, of which ~~$2,818~~$1,130 were cash dividends and ~~$5,202~~$1,877 were reinvested ~~through~~under the dividend reinvestment plan. The cash dividends were paid ~~with~~from the ~~$32,840~~$7,457 from our cash flows from operations.

We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate cash ~~flow~~ and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.

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The following table presents certain information regarding our dividend coverage:


	Nine months ended				Three months ended
	September 30,				March 31,
	2022		2021		2023		2022

	(in thousands)				(in thousands)
Cash flows provided by operations (includes net income of $20,812 and $19,832, respectively)	$	28,757	$	32,840
Cash flows provided by operations (net (loss) income of $(688) and $3,389, respectively)					$	4,474	$	7,457
Distributions in excess of earnings received from unconsolidated affiliates		408		—		659		105
Gain on sales of real estate and non-real estate investments		9,897		1,710		—		1,329
Dividends declared		(9,114)		(8,020)		(3,147)		(3,007)
Excess	$	29,948	$	26,530	$	1,986	$	5,884

Limited Partnership Units

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

For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we declared quarterly distributions totaling ~~$16,097~~$5,373 to holders of limited partnership units in our Operating Partnership, which we paid on April ~~15; July 15; and October~~ 17, ~~2022.~~2023. 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.

For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we declared quarterly distributions totaling ~~$14,493~~$5,359 to holders of limited partnership units in our Operating Partnership, which we paid on April ~~15; July 15; and October~~ 15, ~~2021.~~2022. Distributions were paid at a rate of ~~$0.2650~~$0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

Sources of Dividends and Distributions

For the ~~nine~~three months ended ~~September 30, 2022, we paid~~March 31, 2023, aggregate dividends and distributions of ~~$8,784, which were paid~~$8,520, are funded with cash flows provided by operating ~~activities.~~activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was ~~$31,309 Therefore,~~$7,388 for the three months ended March 31, 2022; therefore, we believe our ~~management believes our~~dividend and distribution policy is sustainable over time. For the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we paid aggregate dividends and distributions of ~~$7,922 which were paid~~$8,366 with cash flows provided by operating ~~activities.~~activities and distributions from unconsolidated affiliates. Our FFO was ~~$35,404~~$8,901 as of the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.

RecentlyIssuedAccountingPronouncements

For a discussion of recently issued accounting pronouncements, see Note 2, Principal Activity and Significant Accounting Policies— Recently Issued Accounting Pronouncements, to the consolidated financial statements that are a part of this Annual Report on Form 10-Q.

Item 3. Quantitative and Qualitative 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, which the Trust manages through the use of derivative financial instruments. Specifically, the Trust enters into derivative financial instruments to manage 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. During the ~~the nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Trust used 12 interest rate swaps to hedge the variable cash flows associated with market interest rate risk. These swaps have an aggregated notional amount of ~~$106,718 at September 30, 2022.~~$105,340 the three months ended March 31, 2023. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.

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As of ~~September 30, 2022,~~March 31, 2023, the Trust had ~~$106,718~~$105,340 of variable-rate borrowings, with the total outstanding balance fixed through interest rate swaps. Even though our goal is to maintain a fairly low exposure to interest rate risk, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt or future debt.

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September 30, 2022,~~March 31, 2023, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the ~~third~~first fiscal quarter of ~~2022~~2023 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, or cash flows.~~operation.

Item 1A. Risk Factors.

~~There~~

We maintain our cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceeds the FDIC insurance coverage of $250,000, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. We do not have any bank accounts, loans from, or any other amounts due to or from any recently failed financial institution, nor have we experienced any losses to date on our cash and cash equivalents held in bank accounts. However, there is no assurance that financial institutions in which we hold our cash and cash equivalents will not fail, in which case we may be subject to a risk of loss or delay in accessing all or a portion of our funds exceeding the FDIC insurance coverage, which could adversely impact our short-term liquidity, ability to operating our business, and financial performance.

Other than as described above, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the period ~~ended~~ended December 31, ~~2021.~~2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Sale of Securities

Neither Sterling nor the Operating Partnership issued any unregistered securities during the three months ended ~~September 30, 2022.~~March 31, 2023.

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Other Sales

During the three months ended ~~September 30, 2022,~~March 31, 2023, we did not issue any common shares in exchange for limited partnership units of the Operating Partnership on a one-for-one basis pursuant to redemption requests made by accredited investors under Section 4 (a) (2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder.Partnership.

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Redemptions of Securities

Set forth below is information regarding common shares and limited partnership units redeemed during the three months ended ~~September 30, 2022:~~March 31, 2023:


			Average		Total Number of	Total Number of	Approximate Dollar Value of				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		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		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		Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs		Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
July 1-31, 2022	2,000	13,000	$	21.85	1,488,000	1,147,000	$	14,999
August 1-31, 2022	7,000	—	$	21.85	1,495,000	1,147,000	$	14,899
September 1-30, 2022	5,000	—	$	21.85	1,500,000	1,147,000	$	14,899
January 1-31, 2023									2,000	28,000	$	21.85	1,499,000	1,181,000	$	14,022
February 1-29, 2023									—	1,000	$	21.85	1,499,000	1,182,000	$	13,993
March 1-31, 2023									6,000	12,000	$	21.85	1,505,000	1,194,000	$	13,587
Total	14,000	13,000							8,000	41,000

For the three months ended ~~September 30, 2022, we~~March 31, 2023, the Trust redeemed all shares or units for which we received redemption requests. In addition, for the three months ended ~~September 30, 2022,~~March 31, 2023, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan, effective January 1, 2022, permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our Operating Partnership, up to ~~an aggregate~~a maximum amount of $55,000 worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The amount remaining to be redeemed as of ~~September 30, 2022,~~March 31, 2023, was ~~$14,899.~~$13,587. The redemption price for such shares and units redeemed under the plan was fixed at $21.85 per share or unit, which became effective January 1, 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 network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend, or suspend the redemption plan at any time if it determines to do so is in our best interest.

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Item 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
~~3.1~~		~~Articles of Organization of Sterling Real Estate Trust filed December 3, 2002~~

~~3.2~~10.1		~~Amendment to Articles of Organization of Sterling Real Estate Trust dated August 1, 2014~~

~~3.3~~		Twelfth Amended and Restated ~~Bylaws dated June 2, 2020~~Advisory Agreement, effective April 1, 2023 (incorporated by reference to Exhibit No. 10.1 to the Trust’s current report on Form 8-K filed March 23, 2023).

~~4.1~~		~~Declaration of Trust Sterling Real Estate Trust dated July 21, 2004~~

~~4.2~~		~~Addendum to Declaration of Trust dated July 25, 2007~~

~~4.3~~		~~Sterling Third Amended and Restated Declaration of Trust dated March 27, 2014~~

~~4.4~~		~~Sterling Third Amended and Restated Declaration of Trust dated June 23, 2016~~

~~4.5~~		~~First Amended and Restated Declaration of Trust dated February 9, 2011~~

~~4.6~~		~~Amendment No. 1 to First Amended and Restated Declaration of Trust dated August 1, 2014~~

~~4.7~~		~~Amended and Restated Share Redemption Plan effective January 1, 2021~~

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

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

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

101		The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2021~~March 31, 2023, formatted in iXBRL (Inline ~~eXtensible~~iXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September 30, 2021~~March 31, 2023 and December 31, ~~2020;~~2022; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2023 and ~~2020;~~2022; (iii) Consolidated Statements of Shareholders’ Equity for ~~the~~ three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2023 and ~~2020;~~2022; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2023 and ~~2020,~~2022, and; (v) Notes to Consolidated Financial Statements.

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

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SIGNATURES

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

Dated:~~November 9, 2022~~May 10, 2023

	STERLING REAL ESTATE TRUST

	By:	/s/ Kenneth P. Regan
		Kenneth P. Regan
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Damon K. Gleave
		Damon K. Gleave
		Chief Financial Officer
		(Principal Financial Officer)

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	September 30, 2022		December 31, 2021

	(in thousands)
ASSETS
Real estate investments	$	202,492	$	134,839
Accumulated depreciation		(15,158)		(10,940)
		187,334		123,899
Cash and cash equivalents		2,054		1,131
Restricted deposits		856		650
Intangible assets, less accumulated amortization		349		41
Other assets, net		740		909
Total Assets	$	191,333	$	126,630

LIABILITIES
Mortgage notes payable, net	$	139,087	$	87,996
Tenant security deposits payable		192		108
Accrued expenses and other liabilities		10,415		8,029
Total Liabilities	$	149,694	$	96,133
SHAREHOLDERS' EQUITY
Total Shareholders' Equity	$	41,639	$	30,497

Total liabilities and shareholders' equity	$	191,333	$	126,630


	Derivatives
Derivatives designated as	September 30, 2022			December 31, 2021
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	14,356	Other assets, net	$	698
Interest rate swaps	Accrued expenses and other liabilities	$	—	Accrued expenses and other liabilities	$	1,648