10-Q

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, 2019

Or

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

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

Commission File Number:000-54295

Sterling Real Estate Trust

d/b/a Sterling Multifamily Trust

(Exact name of registrant as specified in its charter)

North Dakota	90-0115411
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1711 Gold Drive South, Suite 100, Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

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

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

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 submitte

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

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

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

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

Class	Outstanding at November 4, 2019
Common Shares of Beneficial Interest, $0.01 par value per share	9,448,754.77

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, 2019 and December 31, 2018	3
Consolidated Statements of Operations and Other Comprehensive Income – Three and nine months ended September 30, 2019 and 2018	4
Consolidated Statements of Shareholders’ Equity – Three and nine months ended September 30, 2019 and 2018	5
Consolidated Statements of Cash Flows –  Nine months ended September 30, 2019 and 2018	7
Notes to Consolidated Financial Statements	9
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.  Controls and Procedures	46
PART II.  OTHER INFORMATION
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.  Exhibits	48
Signatures	49

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of September 30, 2019 (UNAUDITED) and December 31, 2018

	September 30,		December 31,
	2019		2018
	(in thousands)
ASSETS
Real estate investments
Land and land improvements	$	114,240	$	114,027
Building and improvements		675,193		675,308
Construction in progress		7,044		1,361
Real estate investments		796,477		790,696
Less accumulated depreciation		(141,730)		(128,112)
Real estate investments, net		654,747		662,584
Cash and cash equivalents		13,685		21,212
Restricted deposits		8,415		8,853
Investment in unconsolidated affiliates		4,046		2,691
Note receivable		1,106		—
Lease intangible assets, less accumulated amortization of $15,124 in 2019 and $13,715 in 2018		9,567		10,976
Other assets, net		6,452		8,151
Total Assets	$	698,018	$	714,467
LIABILITIES
Mortgage notes payable, net	$	390,092	$	406,017
Dividends payable		7,090		6,828
Tenant security deposits payable		4,436		4,286
Lease intangible liabilities, less accumulated amortization of $1,819 in 2019 and $1,621 in 2018		1,269		1,468
Accrued expenses and other liabilities		14,983		12,117
Total Liabilities		417,870		430,716
COMMITMENTS and CONTINGENCIES - Note 14
SHAREHOLDERS' EQUITY
Beneficial interest		101,314		97,883
Noncontrolling interest
Operating partnership		176,413		183,360
Partially owned properties		2,437		2,538
Accumulated other comprehensive loss		(16)		(30)
Total Shareholders' Equity		280,148		283,751
	$	698,018	$	714,467

See Notes to Consolidated Financial Statements

3

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED September 30, 2019 and 2018 (UNAUDITED)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in thousands, except per share data)				(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	30,173	$	27,591	$	90,275	$	82,205
Tenant reimbursements		—		1,464		—		4,597
		30,173		29,055		90,275		86,802
Expenses
Expenses from rental operations
Operating expenses, excluding real estate taxes		12,344		11,311		36,355		34,022
Real estate taxes		3,036		2,889		9,084		8,633
Depreciation and amortization		5,322		5,274		16,213		15,907
Interest		4,521		4,557		13,819		13,632
		25,223		24,031		75,471		72,194
Administration of REIT		969		1,460		3,051		3,703
Total expenses		26,192		25,491		78,522		75,897
Income from operations		3,981		3,564		11,753		10,905
Other income
Equity in income of unconsolidated affiliates		235		161		629		445
Other income		70		45		186		206
Gain on sale of real estate and non-real estate investments		—		3,214		—		4,298
(Loss)/gain on involuntary conversion		(816)		100		(487)		1,467
		(511)		3,520		328		6,416
Net income	$	3,470	$	7,084	$	12,081	$	17,321
Net income attributable to noncontrolling interest:
Operating Partnership		2,312		4,739		8,034		11,651
Partially owned properties		(55)		(34)		(101)		(127)
Net income attributable to Sterling Real Estate Trust	$	1,213	$	2,379	$	4,148	$	5,797
Net income per common share, basic and diluted	$	0.13	$	0.27	$	0.45	$	0.66
Comprehensive income:
Net income	$	3,470	$	7,084	$	12,081	$	17,321
Other comprehensive gain - change in fair value of interest rate swaps		6		8		14		32
Comprehensive income		3,476		7,092		12,095		17,353
Comprehensive income attributable to noncontrolling interest		2,261		4,710		7,942		11,546
Comprehensive income attributable to Sterling Real Estate Trust	$	1,215	$	2,382	$	4,153	$	5,807

See Notes to Consolidated Financial Statements

4

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 

FOR THE THREE AND NINE MONTHS ENDED September 30, 2019 and 2018 (UNAUDITED)

			Accumulated		Noncontrolling
			Distributions	Total	Interest		Accumulated
	Common	Paid-in	in Excess of	Beneficial	Operating	Partially Owned	Comprehensive
	Shares	Capital	Earnings	Interest	Partnership	Properties	Income (Loss)	Total
	(in thousands)
BALANCE AT DECEMBER 31, 2018	8,967	$ 122,624	$ (24,741)	$ 97,883	$ 183,360	$ 2,538	$ (30)	$ 283,751
Shares/units redeemed	(11)	(197)	-	(197)	(629)	-	-	(826)
Dividends declared	-	-	(2,374)	(2,374)	(4,661)	-	-	(7,035)
Dividends reinvested - stock dividend	82	1,479	-	1,479	-	-	-	1,479
Issuance of shares under optional purchase plan	49	929	-	929	-	-	-	929
Change in fair value of interest rate swaps	-	-	-	-	-	-	4	4
Net income	-	-	1,288	1,288	2,532	(30)	-	3,790
Balance at March 31, 2019	9,087	$ 124,835	$ (25,827)	$ 99,008	$ 180,602	$ 2,508	$ (26)	$ 282,092
Shares/units redeemed	(9)	(154)	-	(154)	(272)	-	-	(426)
Dividends declared	-	-	(2,407)	(2,407)	(4,657)	-	-	(7,064)
Dividends reinvested - stock dividend	86	1,554	-	1,554	-	-	-	1,554
Issuance of shares under optional purchase plan	42	795	-	795	-	-	-	795
Change in fair value of interest rate swaps	-	-	-	-	-	-	4	4
Net income	-	-	1,647	1,647	3,190	(16)	-	4,821
Balance at June 30, 2019	9,206	$ 127,030	$ (26,587)	$ 100,443	$ 178,863	$ 2,492	$ (22)	$ 281,776
Shares issued under trustee compensation plan	3	62	-	62	-	-	-	62
Shares/units redeemed	(13)	(242)	-	(242)	(79)	-	-	(321)
Dividends declared	-	-	(2,435)	(2,435)	(4,655)	-	-	(7,090)
Dividends reinvested - stock dividend	87	1,558	-	1,558	-	-	-	1,558
Issuance of shares under optional purchase plan	36	687	-	687	-	-	-	687
UPREIT units converted to REIT common shares	1	28	-	28	(28)	-	-	-
Change in fair value of interest rate swaps	-	-	-	-	-	-	6	6
Net income	-	-	1,213	1,213	2,312	(55)	-	3,470
BALANCE AT SEPTEMBER 30, 2019	9,320	$ 129,123	$ (27,809)	$ 101,314	$ 176,413	$ 2,437	$ (16)	$ 280,148

See Notes to Consolidated Financial Statements

5

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED September 30, 2019 AND 2018 (UNAUDITED) (Continued)

				Accumulated		Noncontrolling
				Distributions	Total	Interest		Accumulated
		Common	Paid-in	in Excess of	Beneficial	Operating	Partially Owned	Comprehensive
		Shares	Capital	Earnings	Interest	Partnership	Properties	Income (Loss)	Total
		(in thousands)
BALANCE AT DECEMBER 31, 2017	8,488		$ 113,995	$ (23,179)	$ 90,816	$ 179,844	$ 3,180	$ (65)	$ 273,775
Contribution of assets in exchange for the issuance of noncontrolling interest shares		-	-	-	-	1,546	-	-	1,546
Shares/units redeemed		(35)	(614)	-	(614)	(316)	-	-	(930)
Dividends declared		-	-	(2,190)	(2,190)	(4,473)	-	-	(6,663)
Dividends reinvested - stock dividend		79	1,373	-	1,373	-	-	-	1,373
Issuance of shares under optional purchase plan		76	1,411	-	1,411	-	-	-	1,411
Change in fair value of interest rate swaps		-	-	-	-	-	-	14	14
Net income		-	-	1,741	1,741	3,536	(19)	-	5,258
Balance at March 31, 2018		8,608	$ 116,165	$ (23,628)	$ 92,537	$ 180,137	$ 3,161	$ (51)	$ 275,784
Shares/units redeemed		(14)	(244)	-	(244)	(489)	-	-	(733)
Dividends declared		-	-	(2,217)	(2,217)	(4,465)	-	-	(6,682)
Dividends reinvested - stock dividend		81	1,425		1,425		-	-	1,425
Issuance of shares under optional purchase plan		40	747	-	747	-	-	-	747
Change in fair value of interest rate swaps		-	-	-	-	-	-	10	10
Net income		-	-	1,677	1,677	3,376	(74)	-	4,979
Balance at June 30, 2018		8,715	$ 118,093	$ (24,168)	$ 93,925	$ 178,559	$ 3,087	$ (41)	$ 275,530
Contribution of assets in exchange for the issuance of noncontrolling interest shares		-	-	-	-	630	-	-	630
Shares/units redeemed		(14)	(241)	-	(241)	(263)	-	-	(504)
Shares issued under trustee compensation plan		3	57	-	57	-	-	-	57
Dividends declared		-	-	(2,248)	(2,248)	(4,470)	-	-	(6,718)
Dividends reinvested - stock dividend		83	1,458	-	1,458	-	-	-	1,458
Issuance of shares under optional purchase plan		50	922	-	922	-	-	-	922
Change in fair value of interest rate swaps		-	-	-	-	-	-	8	8
Distributions paid to consolidated real estate entity noncontrolling interests		-	-	-	-	-	(477)	-	(477)
Net income		-	-	2,379	2,379	4,739	(34)	-	7,084
BALANCE AT SEPTEMBER 30, 2018		8,837	$ 120,289	$ (24,037)	$ 96,252	$ 179,195	$ 2,576	$ (33)	$ 277,990

See Notes to Consolidated Financial Statements

6

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED September 30, 2019 and 2018 (UNAUDITED)

	Nine Months Ended
	September 30,
	2019		2018
	(in thousands)
OPERATING ACTIVITIES
Net income	$	12,081	$	17,321
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of real estate investments		—		(4,298)
Loss/(Gain) on involuntary conversion		487		(1,467)
Equity in income of unconsolidated affiliates		(629)		(445)
Distributions of earnings of unconsolidated affiliates		629		445
Allowance for uncollectible accounts receivable		125		(567)
Depreciation		14,785		14,267
Amortization		1,390		1,590
Amortization of debt issuance costs		465		523
Effects on operating cash flows due to changes in
Other assets		1,908		(1,102)
Tenant security deposits payable		150		(1)
Accrued expenses and other liabilities		2,624		2,085
NET CASH PROVIDED BY OPERATING ACTIVITIES		34,015		28,351
INVESTING ACTIVITIES
Purchase of real estate investment properties		—		(6,079)
Capital expenditures and tenant improvements		(8,935)		(8,639)
Proceeds from sale of real estate investments and non-real estate investments		—		13,052
Proceeds from involuntary conversion		1,513		1,111
Investment in unconsolidated affiliates		(1,323)		(81)
Distributions in excess of earnings received from unconsolidated affiliates		(32)		88
Notes receivable issued		(1,106)		—
NET CASH USED IN INVESTING ACTIVITIES		(9,883)		(548)
FINANCING ACTIVITIES
Payments for financing, debt issuance and lease costs		(27)		(272)
Principal payments on special assessments payable		(245)		(141)
Proceeds from issuance of mortgage notes payable and subordinated debt		—		10,281
Principal payments on mortgage notes payable		(16,330)		(12,028)
Advances on lines of credit		—		3,811
Payments on lines of credit		—		(3,811)
Proceeds from issuance of shares under optional purchase plan		2,411		3,080
Shares/units redeemed		(1,573)		(2,167)
Dividends/distributions paid		(16,333)		(16,001)
NET CASH USED IN FINANCING ACTIVITIES		(32,097)		(17,248)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS		(7,965)		10,555
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD		30,065		20,553
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD	$	22,100	$	31,108
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD
Cash and cash equivalents	$	13,685	$	16,297
Restricted deposits		8,415		14,811
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD	$	22,100	$	31,108

See Notes to Consolidated Financial Statements

7

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED September 30, 2019 and 2018 (UNAUDITED) (Continued)

	Nine Months Ended
	September 30,
	2019		2018
	(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	13,884	$	13,648
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	4,591	$	4,256
Dividends declared and not paid		2,435		2,248
UPREIT distributions declared and not paid		4,655		4,470
UPREIT units converted to REIT common shares		28		—
Shares issued pursuant to trustee compensation plan		62		57
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		—		2,176
Increase in land improvements due to increase in special assessments payable		213		399
Unrealized gain on interest rate swaps		14		32
Acquisition of assets through assumption of debt and liabilities		—		71
Capitalized interest and real estate taxes related to construction in progress		55		108
Acquisition of assets with accounts payable		—		215

See Notes to Consolidated Financial Statements

8

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

Note 1 - Organization

Sterling Real Estate Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002.  Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, 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. 

Sterling previously established an operating partnership (“Sterling Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of September 30, 2019 and December 31, 2018, Sterling owned approximately 34.34% and 33.41%, 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, 2018, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2019 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 2019 and 2018, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and nine months ended September 30, 2019. These adjustments are of a normal recurring nature.

Principles of Consolidation

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

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.

9

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

Principal Business Activity

Sterling currently owns directly and indirectly 173 properties.  The Trust’s 125 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings.  The Trust owns 48 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties.  Presently, the Trust’s mix of properties is 73.3% residential and 26.7% commercial (based on cost) and total $654,747 in real estate investments at September 30, 2019. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.  We currently have no plans to actively market our existing commercial properties for sale.  We will consider unsolicited offers for purchase of non-multifamily properties on a case by case basis. Prior to June 30, 2019, Sterling did not account for mezzanine and storage space square footage on their commercial properties. As of June 30, 2019 the addition to this space led to an additional 36,000 square feet of commercial property.

Residential Property	Location	No. of Properties	Units
	North Dakota	105	6,160
	Minnesota	16	3,033
	Missouri	1	164
	Nebraska	3	495
		125	9,852
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	15	680,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		48	1,662,000

Concentration of Credit Risk

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

Use of Estimates

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (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 Company allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market, and (vi) goodwill, if any. Transaction costs related to acquisitions accounted for as asset acquisitions are expensed as incurred and included within “Administration of REIT expenses” in the accompanying consolidated statements of operations and other comprehensive income.

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

The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Company incurred amortization expense pertaining to acquired in-place lease value intangibles of $401 and $473for the three months ended September 30, 2019 and 2018, respectively and $1,249 and $1,516 for the nine months ended September 30, 2019 and 2018, respectively.

The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $54 and $55 for the three months ended September 30, 2019 and 2018, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $65 and $68 for the three months ended September 30, 2019 and 2018, respectively, was recorded as an increase to real estate rental income.  Amortization pertaining to above market lease intangibles of $160 and $166 for the nine months ended September 30, 2019 and 2018, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $198 and $208 for the nine months ended September 30, 2019 and 2018, respectively, was recorded as an increase to real estate rental income.

11

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

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

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

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

Depreciation expense for the three months ended September 30, 2019 and 2018 totaled $4,879 and $4,761, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 totaled $14,785 and $14,267, respectively.

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

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

· a substantial decline or continued low occupancy rate;

· continued difficulty in leasing space;

· significant financially troubled tenants;

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

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

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

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

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

· projected capital expenditures and lease origination costs;

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

· comparable selling prices; and

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

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties.  There were no impairment losses during the nine months ended September 30, 2019 and 2018. 

12

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

Properties Held for Sale

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

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

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

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

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

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

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

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

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

There were no properties classified as held for sale at September 30, 2019 or at December 31, 2018.

Construction in Progress

The Company 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, 2019 consists primarily of development and planning costs associated with the Glen Pond development in Eagan, Minnesota and the Goldmark Office Park 1715 building located in Fargo, North Dakota. The Glen Pond development consists of 114 units of multifamily property. Current expectations are that the project will be completed in the second or third quarter of calendar year 2020 and the current project budget approximates $15,598. The Goldmark Office Park 1715 building is a commercial office building. Current expectations are that the project will be completed in the fourth quarter of calendar year 2019 and the current project budget is approximately $2,000.

Cash, Cash Equivalents and Restricted Deposits

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents. Restricted deposits include funds escrowed for tenant security deposits, real estate tax, insurance and mortgage escrow and escrow

13

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

deposits required by lenders on certain properties to be used for future building renovations or tenant improvements and potential Internal Revenue Code Section 1031 tax deferred exchanges (1031 Exchange).

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under FASB ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings, contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with FASB ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the nine months ended September 30, 2019 and 2018.

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

In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns.  As of September 30, 2019, our tenant in common arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. As of September 30, 2019, our investment in the joint venture does not qualify as a variable interest entity, does not meet the control requirements for consolidation or significant influence requirements, as defined in ASC 810, and does meet the definition of a joint venture.

As of September 30, 2019 and December 31, 2018, the unconsolidated affiliates held total assets of $24,710 and $22,954 and mortgage notes payable of $16,793 and $17,091, respectively.

The operating partnership is a 50% owner of a retail center as a tenant in common through 100% ownership in a limited liability company.  The retail center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2019 and December 31, 2018 of $10,320 and $10,483, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2019 and December 31, 2018 of $6,473 and $6,608, respectively. The Company is jointly and severally liable for the full mortgage balance.

14

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

The operating partnership owns a 60% interest in a joint venture (“SE Savage”) that intends to develop a 190 unit multifamily property. The operating partnership has contributed $1,323 in cash to SE Savage during September 2019. SE Savage holds land located in Savage, Minnesota, total assets of $2,205, and no mortgage payable.  

Receivables

Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, beginning with the adoption of ASC 842 as of January 1, 2019, the operating partnership recognizes an adjustment to rental income. Prior to the adoption of ASC 842, The Company recognized a provision for uncollectible amounts or a direct write-off of the specific rent receivable.

Notes receivable are issued periodically and are secured and interest bearing. Receivables are included in “Other assets” in the accompanying consolidated balance sheets.

Financing and Lease Costs

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

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

Debt Issuance Costs

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

Lease Intangible Assets

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

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no impairment charges were necessary at September 30, 2019 and December 31, 2018.

15

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

Noncontrolling Interest

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

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

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

Syndication Costs

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

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in generally the same manner as they are taxed on other corporate distributions.

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

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP.  The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We follow FASB ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 2019 and December 31, 2018 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our

16

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2015.

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

Revenue Recognition

We are the lessor for our residential and commercial leases and these leases will continue to be accounted for as operating leases under the new standard as described under Recent Accounting Pronouncements.  Therefore, the Company did not have significant changes in accounting for lease revenues.

As of September 30, 2019, we derived 83% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same.  The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis.  Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of September 30, 2019, we derived 17% of our revenues from commercial leases primarily under long-term lease agreements. We elected to apply the package of practical expedients for the commercial leases and these leases will continue to be accounted for as operating leases as of January 1, 2019.  Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

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

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment decreased revenue by $39 and increased revenue by $17 for the three months ended September 30, 2019 and 2018, respectively. The straight-line rent adjustment increased revenue by $17 and $87 the nine months ended September 30, 2019 and 2018, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, 2019 and December 31, 2018 was $3,391 and $3,374, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

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

17

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

income” beginning January 1, 2019 in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental income.

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

	Nine months ended September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	68,938	$	14,675	$	83,613
Lease income related to variable lease payments		—		4,570		4,570
Other (a)		(706)		55		(651)
Lease Income (b)	$	68,232	$	19,300	$	87,532

(a) For the nine months ended September 30, 2019, “Other” is comprised of revenue adjustments related to changes in collectibility and amortization of above and below market lease intangibles and lease inducements.

(b) Excludes other rental income for the nine months ended September 30, 2019 of $2,743, which is accounted for under the revenue recognition standard.

	Three months ended  September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	23,064	$	4,969	$	28,033
Lease income related to variable lease payments		—		1,531		1,531
Other (a)		(301)		(27)		(328)
Lease Income (b)	$	22,763	$	6,473	$	29,236

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

(b) Excludes other rental income for the three months ended September 30, 2019 of $937, which is accounted for under the revenue recognition standard.

As of September 30, 2019, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.

Years ending December 31,	Amount
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	4,652
2020		17,578
2021		14,333
2022		10,958
2023		9,205
Thereafter		51,699
	$	108,425

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 as of September 30, 2019 and 2018, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

18

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

For the three months ended September 30, 2019 and 2018, Sterling’s denominators for both basic and diluted earnings per common share were approximately 9,322,000 and 8,840,000, respectively. For the nine months ended September 30, 2019 and 2018, Sterling’s denominators for the basic and diluted earnings per common share were approximately 9,208,000 and 8,730,000, respectively.

Reclassifications

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

Recent Accounting Pronouncements

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

The new standard was effective for the Company effective January 1, 2019. The new standard was adopted using the optional transition method to apply the standard as of the effective date. The Company elected to apply the package of practical expedients for the leases as lessor for its residential and commercial leases and these leases will continue to be accounted for as operating leases as of the effective date. Further, the Company elected the practical expedient to combine lease and nonlease components for leases as lessor. Finally, the Company evaluated taxes collected from lessees, lessor costs paid directly by lessees, and initial direct costs and determined that the guidance was consistent with existing practice. Based on these evaluations, the Company determined that for leases as lessor, as of January 1, 2019, there was no impact on lease revenue or related expenses.

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

NOTE 3 – segment reporting

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

19

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (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, 2019 and 2018, 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, 2019						Three months ended  September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	23,662	$	6,511	$	30,173	$	22,439	$	6,616	$	29,055
Expenses from rental operations		13,570		1,810		15,380		12,247		1,953		14,200
Net operating income	$	10,092	$	4,701	$	14,793	$	10,192	$	4,663	$	14,855
Depreciation and amortization						5,322						5,274
Interest						4,521						4,557
Administration of REIT						969						1,460
Other (income)/expense						511						(3,520)
Net income					$	3,470					$	7,084

	Nine months ended September 30, 2019						Nine months ended September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	70,920	$	19,355	$	90,275	$	66,683	$	20,119	$	86,802
Expenses from rental operations		39,954		5,485		45,439		37,093		5,562		42,655
Net operating income	$	30,966	$	13,870	$	44,836	$	29,590	$	14,557	$	44,147
Depreciation and amortization						16,213						15,907
Interest						13,819						13,632
Administration of REIT						3,051						3,703
Other (income)/expense						(328)						(6,416)
Net income					$	12,081					$	17,321

Segment Assets and Accumulated Depreciation

As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	601,574	$	194,903	$	796,477
Accumulated depreciation		(100,837)		(40,893)		(141,730)
	$	500,737	$	154,010		654,747
Cash and cash equivalents						13,685
Restricted deposits and funded reserves						8,415
Investment in unconsolidated affiliates						4,046
Other assets						7,558
Intangible assets, less accumulated amortization						9,567
Total Assets					$	698,018

20

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

As of December 31, 2018	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	595,006	$	195,690	$	790,696
Accumulated depreciation		(90,143)		(37,969)		(128,112)
	$	504,863	$	157,721		662,584
Cash and cash equivalents						21,212
Restricted deposits and funded reserves						8,853
Investment in unconsolidated affiliates						2,691
Other assets						8,151
Intangible assets, less accumulated amortization						10,976
Total Assets					$	714,467

NOTE 4 - Lease intangibles

The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:

	Lease		Accumulated		Lease
As of September 30, 2019	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	21,480	$	(13,671)	$	7,809
Above-market leases		3,211		(1,453)		1,758
	$	24,691	$	(15,124)	$	9,567
Lease Intangible Liabilities
Below-market leases	$	(3,088)	$	1,819	$	(1,269)

	Lease		Accumulated		Lease
As of December 31, 2018	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	21,480	$	(12,422)	$	9,058
Above-market leases		3,211		(1,293)		1,918
	$	24,691	$	(13,715)	$	10,976
Lease Intangible Liabilities
Below-market leases	$	(3,089)	$	1,621	$	(1,468)

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

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

	Intangible		Intangible
Years ending December 31,	Assets		Liabilities
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	434	$	62
2020		1,456		213
2021		1,163		184
2022		1,028		164
2023		891		151
Thereafter		4,595		495
	$	9,567	$	1,269

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 2019 was 6.7 years.

NOTE 5 – LINES OF CREDIT

We have a $18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2021; a $6,315 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires in November 2019; a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires June 2022; and a $3,200 variable rate (LIBOR plus 2.04%) line of credit agreement with Bank of the West, which expires November 2020. The lines of credit are secured by properties in Duluth, Edina, Moorhead and St. Cloud, Minnesota; and Bismarck, Dickinson, Grand Forks and Fargo, North Dakota. At September 30, 2019, there was no balance outstanding on the lines of credit, leaving $32,815 available and unused under the agreements. 

Certain line of credit agreements includes covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios on an annual and semi-annaul basis.  As of December 31, 2018, three residential properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis.  As of December 31, 2018, the pooled property debt yield was out of compliance with Wells Fargo’s requirement.  Annual waivers were received from the lenders.

NOTE 6 - MORTGAGE NOTES PAYABLE

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

	Principal Balance At
	September 30,		December 31,
	2019		2018
	(in thousands)
Fixed rate mortgage notes payable (a)	$	392,009	$	408,339
Less unamortized debt issuance costs		1,917		2,322
	$	390,092	$	406,017

(a) Includes $827 and $865 of variable rate mortgage debt that was swapped to a fixed rate at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, we had 122 mortgage loans with effective interest rates ranging from 3.54% to 7.25% per annum and a weighted average effective interest rate of 4.40% per annum.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

As of December 31, 2018, we had 127 mortgage loans with effective interest rates ranging from 3.44% to 7.25% per annum, and a weighted average effective interest rate of 4.42% per annum.

The majority of the Company’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs.  Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits.

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.  As of December 31, 2018, nine loans on residential properties were out of compliance with annual loan covenants due to various unit renovation and parking lot repair and maintenance costs and increased vacancies in the North Dakota markets.  The loans were secured by properties located in Bismarck, Fargo and Grand Forks, North Dakota with a total outstanding balance of $13,128 at December 31, 2018. Annual waivers have been received from the lenders. 

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)
2019 (October 1, 2019 to December 31, 2019)	$	9,281
2020		28,011
2021		46,541
2022		31,788
2023		48,046
Thereafter		228,342
Total payments	$	392,009

NOTE 7 – HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we have used derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings. To meet these objectives, we entered into an interest rate swap in the notional amount of $1,294 to provide a fixed rate of 7.25% that matures in April 2020.  The swap was issued at approximate market terms and thus no fair value adjustment was recorded at inception.

The carrying amount of the swap has been adjusted to its fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps.  The interest rate swap is accounted for as an effective hedge in accordance with FASB ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to accumulated comprehensive income. As of September 30, 2019 and December 31, 2018, we recorded a liability and other accumulated comprehensive loss of $16 and $30, respectively.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

NOTE 8 - FAIR VALUE MEASUREMENT

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

	September 30, 2019				December 31, 2018
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable, net	$	390,092	$	408,491	$	406,017	$	400,192
Fair value of interest rate swaps	$	16	$	16	$	30	$	30

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

ASC 820-10 established a three-level valuation hierarchy for fair value measurement.  Management uses these valuation techniques to establish the fair value of the assets at the measurement date.  These valuation techniques are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions. 

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

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

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

· Level 3 – Instruments whose significant inputs are unobservable.

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

Recurring Fair Value Measurements

The following table presents the 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
	(in thousands)
September 30, 2019
Fair value of interest rate swaps	$	—	$	16	$	—	$	16
December 31, 2018
Fair value of interest rate swaps	$	—	$	30	$	—	$	30

Fair value of interest rate swaps:  The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2019 and December 31, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 7.

Fair Value Disclosures

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

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2019
Mortgage notes payable, net	$	—	$	—	$	408,491	$	408,491
December 31, 2018
Mortgage notes payable, net	$	—	$	—	$	400,192	$	400,192

Mortgage notes payable:  The Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders. Judgment is used in determining the appropriate rate for each of the Company’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 3.60% to 3.60% and from 4.82% to 4.83% at September 30, 2019 and December 31, 2018, respectively. The fair value of the Company’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of September 30, 2019 and December 31, 2018. The Company’s mortgage notes payable are further described in Note 6.

NOTE 9 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of September 30, 2019 and December 31, 2018, outstanding limited partnership units totaled 17,820,000 and 17,876,000 respectively. For the three months ended September 30, 2019 and 2018, the operating partnership declared distributions of $4,655 and $4,470 respectively, to limited partners which were paid on October 15, 2019 and 2018, respectively.  Distributions per unit were $0.78375 and $0.763125 during the nine months ended September 30, 2019 and 2018, respectively.

During the nine months ended September 30, 2019 Sterling exchanged 1,475 common shares for 1,475 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $28. During the nine months ended September 30, 2018 there were no limited partnership units exchanged for common shares pursuant to redemption requests. 

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

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

NOTE 10 – REDEMPTION PLANS

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans. Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $35,000 worth of securities. Currently, the fixed redemption price is $18.00 per share or unit under the plans, which price became effective January 1, 2019.

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

During the nine months ended September 30, 2019 and 2018, the Company redeemed 33,000 and 63,000 common shares valued at $593 and $1,099.  In addition, during the nine months ended September 30, 2019 and 2018, the Company redeemed 55,000 and 61,000 units valued at $980 and $1,068.

NOTE 11 – BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of September 30, 2019 and December 31, 2018, there were 9,320,000 and 8,967,000 common shares outstanding, respectively. We had no preferred shares outstanding as of either date.

For the three months ended September 30, 2019 and 2018, the operating partnership declared dividends of $2,435 and $2,248 respectively, to holders of commons shares which were paid on October 15, 2019 and 2018, respectively. Dividends paid to holders of common shares were $0.78375 per share and $0.763125 per share for the nine months ended September 30, 2019 and 2018, respectively.

NOTE 12 – DIVIDEND REINVESTMENT PLAN

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

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

The estimated value per common share was $19.00 and $18.50 at September 30, 2019 and December 31, 2018, respectively. See discussion of determination of estimated value in Note 16.

Therefore, the purchase price per common share for dividend reinvestments was $18.05 and $17.58 and for additional optional cash purchases was $19.00 and $18.50 at September 30, 2019 and December 31, 2018, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten-day notice to participants.

In the nine months ended September 30, 2019, 255,000 shares were issued pursuant to dividend reinvestments and 127,000 shares were issued pursuant to additional optional cash purchases under the plan.  In the nine months ended September 30, 2018, 243,000 shares were issued pursuant to dividend reinvestments and 166,000 shares were issued pursuant to additional optional cash purchases under the plan. 

NOTE 13 – RELATED PARTY TRANSACTIONS

Property Management Fees

During the nine months ended September 30, 2019 and 2018, we paid property management fees to GOLDMARK Property Management in an amount equal to 5% of rents of the properties managed by GOLDMARK. GOLDMARK Property Management is owned in part by Kenneth Regan, James Wieland and Joel Thomsen. For the nine months ended September 30, 2019 and 2018, we paid management fees of $9,530 and $8,934, respectively, to GOLDMARK Property Management.  In addition, during the nine months ended September 30, 2019 and 2018, we paid repair and maintenance related payroll and payroll related expenses to GOLDMARK Property Management totaling $4,664 and $3,921, respectively.

Board of Trustee Fees

We incurred Trustee fees of  $44 and  $53 during the nine months ended September 30, 2019 and 2018, respectively.  As of September 30, 2019, and December 31, 2018 we owed our Trustees $15 and $34 for unpaid board of trustee fees, respectively.  There is no cash retainer paid to Trustees.  Instead, we pay Trustees specific amounts for meetings attended. 

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

The plan provides:

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

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

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The following is a brief description of the current fees and compensation that may be 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 28, 2019, effective until March 31, 2020.  The Board of Trustees approved amendment number one to the eighth amended and restated Advisory Agreement on September 19, 2019.

Management Fee: 0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

During the nine months ended September 30, 2019 and 2018, we incurred advisory management fees of $2,244 and $2,167 with Sterling Management, LLC, our Advisor. As of September 30, 2019 and December 31, 2018, we owed our Advisor $250 and $242, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations.  During the nine months ended September 30, 2019 and 2018, we reimbursed the Advisor for operating costs totaling $22 and $23, respectively.  There were no unpaid reimbursable operating costs owed to our Advisor as of September 30, 2019 or December 31, 2018.

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

During the nine months ended September 30, 2019 there were no acquisition fees incurred with our Advisor.  During the nine months ended September 30, 2018 we incurred acquisition fees of $205 with our Advisor.  There were no acquisition fees owed to our Advisor as of September 30, 2019. As of December 31, 2018, we owed our Advisor $32 for unpaid acquisition fees.  

Disposition Fee: For its services in the effort to sell any investment for us, the Advisor receives a disposition fee of 2.5% of the sales price of each property disposition, capped at $375 per disposition.

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

During the nine months ended September 30, 2019 there were no disposition fees incurred with our Advisor.  During the nine months ended September 30, 2018, we incurred $130 in disposition fees with our Advisor. See Note 15. There were no disposition fees owed to our Advisor as of September 30, 2019 or December 31, 2018.

Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility. The finance fee shall be capped at $38 per loan, refinance, line of credit or other credit facility.

During the nine months ended September 30, 2019 there were no financing fees incurred with our Advisor for loan financing and refinancing activities. During the nine months ended September 30, 2018, we incurred financing fees of  $61 with our Advisor. There were no financing fees owed to our Advisor as of September 30, 2019.  As of December 31, 2018, we owed our Advisor $8 for unpaid financing fees. 

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

During the three and nine months ended September 30, 2019, there were $3 in project management fees incurred with our Advisor for capital improvement projects. As of September 30, 2019 we owed our Advisor $3 for unpaid project management fees.

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

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

TC = Total Project Cost

During the nine months ended September 30, 2019 and 2018, there were no development fees incurred with our Advisor. As of both September 30, 2019, and December 31, 2018, we owed our Advisor a total of $104 for unpaid development fees, of which the entire amount was for unpaid development fees as part of a 10% hold back with respect to the Stonefield development project, respectively.

Operating Partnership Units Issued in Connection with Acquisitions

During the nine months ended September 30, 2019, there were no operating partnership units issued directly or indirectly, to affiliated entities.

During the nine months ended September 30, 2018, we issued directly or indirectly 42,000 operating partnership units to entities 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 $773. 

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

Commissions

During the nine months ended September 30, 2019, there were no commissions incurred with a related party.

During the nine months ended September 30, 2018, we incurred real estate commissions of $21 owed to GOLDMARK Commercial Real Estate Services, Inc. (f/k/a GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc. ) which is controlled by Messrs. Regan and Wieland. There were no outstanding commissions owed as of September 30, 2019 or December 31, 2018.

Rental Income

During the nine months ended September 30, 2019 and 2018, we received rental income of $42 and $37, respectively, under an operating lease agreement with our Advisor.

During the nine months ended September 30, 2019 and 2018, we received rental income of $42 and $41, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.

During the nine months ended September 30, 2019 and 2018, we received rental income of $173 and $172, respectively, under operating lease agreements with GOLDMARK Property Management.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

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

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

Litigation

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

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

NOTE 15 – DISPOSITIONS

During the nine months ended September 30, 2019, the operating partnership did not dispose of any properties. During the nine months ended September 30, 2018, the operating partnership sold three properties. We sold an industrial property located in Redwood Falls, Minnesota for $5,200 and recognized a gain of $935 in April 2018. We sold a retail property located in Austin, Texas for $3,615 and recognized a gain of $1,266 in July 2018. We sold one of two buildings included in an office property located in Bismarck, North Dakota for $4,250 and recognized a gain of $1,514 in July 2018.

NOTE 16 – ACQUISITIONS

The Company had no acquisitions during the nine months ended September 30, 2019. The Company closed on the following acquisitions during the nine months ended September 30, 2018:

Date	Property Name	Location	Property Type	Units/ Square Footage/ Acres		Acquisition Price
3/1/18	Thunder Creek Apartments	Fargo, ND	Apartment complex	57 units	$	4,460	(a)
9/1/18	Chandler 1834	Grand Forks, ND	Apartment complex	12 units		630
9/17/18	Dairy Queen (b)	Apple Valley, MN	Retail building	5,348 sq. ft.		3,000
					$	8,090	(b)

(a) The property was acquired utilizing Internal Revenue Code 1031 tax-deferred exchange funds..

(b) Acquisition price does not include capitalized costs and adjustments of $236.

Total consideration given for acquisitions through September 30, 2018 was completed through issuing approximately 118,000 limited partnership units of the operating partnership valued at $18.50 per unit for an aggregate consideration of approximately $2,176, 1031 tax-deferred exchange funds of $3,004, assumed liabilities of $71 and cash of  $3,075. 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 prorations, the Company recorded in conjunction with the acquisitions discussed above:

	Nine Months Ended
	September 30,
		2019		2018
Land, building, tenant improvements and FF&E	$	-	$	8,326
Other liabilities		-		(71)
Net assets acquired		-		8,255
Equity/limited partnership unit consideration		-		(2,176)
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange	-		(3,004)
Net cash consideration	$	-	$	3,075

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in the first nine months of 2019 and 2018.  In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

value for the limited partnership units in the first nine months of 2019 and 2018.  In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations.  The Board typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information.

The Board determined the fair value of the shares and limited partnership units to be $18.50 per share/unit effective January 1, 2018. The Board determined the fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019.

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

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

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

NOTE 17 - SUBSEQUENT EVENTS

On October 15, 2019, we paid a dividend or distribution of $0.26125 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, 2019.

On October 2, 2019, we entered into an interest rate swap in the notional amount of $7,200 to provide a fixed rate of 3.15% that matures November 1, 2029. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it will be recorded at fair value and changes in fair value are recorded to accumulated comprehensive income.

On November 1, 2019, the operating partnership decided to self-insure 50% of the primary layer of their insurance policy, as a result the operating partnership believes it is reasonably possible that we could be required to pay between $0 and $860.  

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and 2018 (UNAUDITED)

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

On November 8, 2019, the operating partnership purchased land in a 60% owned joint venture (“SE Maple Grove”) that intends to develop a 160 unit multifamily property. SE Maple Grove holds land located in Maple Grove, Minnesota, and has total assets of $3,455, and no mortgage payable.

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

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

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

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

Overview

Sterling Real Estate Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002.  Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.  Our real estate portfolio consisted of 173 properties containing 9,852 apartment units and approximately 1,662,000 square feet of leasable commercial space as of September 30, 2019.  

We operate as an Umbrella Partnership Real Estate Investment Trust (UPREIT), which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we hold all or substantially all of our assets through our operating partnership. We control the operating partnership as the sole general partner and own approximately 34.34% of the operating partnership as of September 30, 2019.  For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, our proportionate shares of the assets and income of our operating partnership are deemed to be assets and income of the trust. 

We use this UPREIT structure to facilitate acquisitions of real estate properties. A sale of property directly to a REIT is generally a taxable transaction to the property seller. However, in an UPREIT structure, if a property seller exchanges the property with one of its operating partnerships in exchange for limited partnership units, the seller may defer taxation of gain in such exchange until the seller resells its limited partnership units or exchanges its limited partnership units for the REIT’s common stock. By offering the ability to defer taxation, we may gain a competitive advantage in acquiring desired properties over other buyers who cannot offer this benefit. In addition, investing in our operating partnership, rather than directly in Sterling, may be more attractive to certain institutional or other investors due to their business or tax structure. If an investor is interested in making a substantial investment in our operating partnership, our structure provides us the flexibility to accommodate different terms for each investment, while applicable tax laws generally restrict a REIT from charging different fee rates among its shareholders. Finally, if our shares become publicly traded, the former property seller may be able to achieve liquidity for the investment in order to pay taxes.

Operating Partnership

Our operating partnership, Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership April 2003 to acquire, own and operate properties on our behalf. The operating partnership holds a diversified portfolio of multifamily and commercial properties located principally in the upper and central Midwest United States.

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As of September 30, 2019, approximately 73.3% of our properties were apartment communities located primarily in North Dakota with others located in Minnesota, Missouri and Nebraska.  Most multifamily properties are leased to a variety of tenants under short‑term leases. 

As of September 30, 2019, approximately 26.7% of our properties were comprised of office, retail, industrial, restaurant and medical commercial property located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin.  We have both single and multi-tenant properties in the commercial portfolio, most of which are under long-term leases. 

Our real estate portfolio consisted of 173 properties containing 9,852 apartment units and approximately 1,662,000 square feet of leasable commercial space as of September 30, 2019.  The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $654,747, which includes construction in progress. Sterling’s current acquisition strategy and focus is on multifamily apartment properties. 

Our Board of Trustees and Executive Officers

We operate under the direction of our Board of Trustees, the members of which are accountable to us and our shareholders. Our trustees are elected annually by our shareholders.  In addition, the Board has a duty to supervise our relationship with the Advisor and evaluates the performance of and fees paid to the Advisor on an annual basis. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on March 28, 2019, effective April 1, 2019 until March 31, 2020.  Our Board of Trustees has provided investment guidance for the Advisor to follow, and must approve each investment recommended by the Advisor. Currently, we have nine members on our board, seven of whom are independent.

Our Advisor

Our external Advisor is Sterling Management, LLC, a North Dakota limited liability company formed in November 2002. Our Advisor, with an office in Fargo, North Dakota, is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.

In September 2019, Sterling Management, LLC onboarded a projects management department that consisted of nine new employees.  This team is responsible for overseeing and managing all capital projects that are being completed on the portfolio’s 173 properties, oversite and management, that was previously being completed by our third party property managers. We expect the internal management of capital projects will allow for efficiencies in how capital projects are managed as well as provide better transparency operationally between all departments of Sterling Management. In addition, the services will allow Sterling Management to provide a complete asset management service to the properties.  Prior to onboarding, the Trust paid a project management fee to the third party property managers. Commencing September 1, 2019, the project management fee calculated on projects will be paid to Sterling Management, LLC.

Critical Accounting Estimates

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

There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the nine months ended September 30, 2019 included elsewhere in this report.

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Specific Achievements

· Increased revenues from rental operations by $3,473 or 4.0% for the nine months ended September 30, 2019, compared to same nine month period in 2018.

· Declared dividends aggregating $0.78375 per common share for the nine months ended September 30, 2019

Results of Operations for the Three Months Ended September 30, 2019 and 2018

	Three months ended  September 30, 2019						Three months ended  September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	23,662	$	6,511	$	30,173	$	22,439	$	6,616	$	29,055
Real Estate Expenses
Real Estate Taxes		2,343		693		3,036		2,194		695		2,889
Property Management		3,220		258		3,478		2,922		240		3,162
Utilities		1,708		309		2,017		1,578		382		1,960
Repairs and Maintenance		5,795		531		6,326		4,987		612		5,599
Insurance		504		19		523		566		24		590
Total Real Estate Expenses		13,570		1,810		15,380		12,247		1,953		14,200
Net Operating Income	$	10,092	$	4,701		14,793	$	10,192	$	4,663		14,855
Interest						4,521						4,557
Depreciation and amortization						5,322						5,274
Administration of REIT						969						1,460
Other (income)/expense						511						(3,520)
Net Income					$	3,470					$	7,084
Net Income Attributed to:
Noncontrolling Interest					$	2,257					$	4,705
Sterling Real Estate Trust					$	1,213					$	2,379
Dividends per share (1)					$	0.2613					$	0.2544
Earnings per share					$	0.13					$	0.27
Weighted average number of common shares						9,322						8,840

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

Revenues

Property revenues of $30,173 for the three months ended September 30, 2019 increased $1,118 or 3.8% in comparison to the same period in 2018. Residential property revenues increased $1,223 and commercial property revenues decreased $105.

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

	September 30,		September 30,
	2019		2018
Residential occupancy	93.9	%	93.0	%

Residential revenues for the three months ended September 30, 2019 increased $1,223 in comparison to the same period for 2018.  Residential properties acquired since January 1, 2018 contributed approximately $784 to the increase in

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total residential revenues in the three months ended September 30, 2019.  Rental income from residential properties owned for more than one year increased approximately $251 in comparison to the three months ended September 30, 2018.  Residential revenues comprised 78.4% of total revenues for the three months ended September 30, 2019 compared to 77.2% of total revenues for the three months ended September 30, 2018.  The residential occupancy rates for the three months ended September 30, 2019 increased 0.83% primarily due to marketing strategies to increase unit rentals, as well as acquisitions occurring in late 2018.

For the three months ended September 30, 2019 total commercial revenues decreased $105 in comparison to the same period for 2018.  The decrease was attributed to the sales of an industrial property in Redwood Falls, Minnesota and a retail property in Austin, Texas, as well as recognizing rental incentives on an office property located in Fargo, North Dakota. Commercial revenues comprised 21.6% of the total revenues for the three months ended September 30, 2019 compared to 22.8% of total revenues for the three months ended September 30, 2018.

Expenses

Residential expenses from operations of $13,570 during the three months ended September 30, 2019 increased $1,323 or 10.8% in comparison to the same period in 2018. The increase was attributed to an increased repairs and maintenance expense of $808 or 16.2% as well as increased real estate taxes of $149 or 6.79%.  Actual property management fees remained unchanged and continue to approximate 5% of net collected rents; however, other property management related expenses have increased slightly due to increased competition for labor. 

Commercial expenses from operations of $1,810 during the three months ended September 30, 2019 decreased $143 or 7.3% in comparison to the same period in 2018.  The decrease was attributed to decreased repairs and maintenance costs, related to increased direct tenant billbacks of $119 or 100%. Direct tenant billbacks is classified as a contra-expense account, offsetting repairs and maintenance expenses.

Interest expense of $4,521 during the three months ended September 30, 2019 decreased $36 or 0.79% in comparison to the same period in 2018.   Interest expense was approximately 15.0% and 15.7% of rental income for the three months ended September 30, 2019 and 2018,  respectively. 

Depreciation and amortization expense of $5,322 during the three months ended September 30, 2019 increased $48 or 0.9% in comparison to the same period in 2018. The increase is primarily due to normal increases in monthly amortization expense.  Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets.

REIT administration expenses of $969 during the three months ended September 30, 2019 decreased $491 or 33.63%  in comparison to the same period in 2018, due to disposition fees recorded in 2018. As of December 31, 2018, all disposition fees are netted with gain or loss on sale of real estate investments. 

Net Operating Income

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

Net Income

Net income for the three months ended September 30, 2019 was $3,470 compared to $7,084 for the three months ended September 30, 2018.  The decrease noted in Net Income is primarily attributed to disposition activity in the prior

37

period that did not occur in the current period.  During the three months ended September 30, 2018, we recognized a gain on sale of two commercial real estate investments of $3,214 compared to $0 in the three months ended September 30, 2019. The three months ended September 30, 2019 also experienced a loss on involuntary conversion of $816 due to the partial demolition of a commercial property located in Fargo, ND.  The three months ended September 30, 2019 has seen increased income from operations of $1,118 which has offset the disposition activity from the three months ended September 30, 2018.

Results of Operations for the Nine Months Ended September 30, 2019

	Nine months ended September 30, 2019						Nine months ended September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(unaudited)						(unaudited)
	(in thousands)						(in thousands)
Real Estate Revenues	$	70,920	$	19,355	$	90,275	$	66,683	$	20,119	$	86,802
Real Estate Expenses
Real Estate Taxes		7,001		2,083		9,084		6,568		2,065		8,633
Property Management		9,504		752		10,256		8,895		676		9,571
Utilities		6,246		897		7,143		5,847		1,118		6,965
Repairs and Maintenance		15,557		1,694		17,251		14,159		1,634		15,793
Insurance		1,646		59		1,705		1,624		69		1,693
Total Real Estate Expenses		39,954		5,485		45,439		37,093		5,562		42,655
Net Operating Income	$	30,966	$	13,870		44,836	$	29,590	$	14,557		44,147
Interest						13,819						13,632
Depreciation and amortization						16,213						15,907
Administration of REIT						3,051						3,703
Other (income)/expense						(328)						(6,416)
Net Income					$	12,081					$	17,321
Net Income Attributed to:
Noncontrolling Interest					$	7,933					$	11,524
Sterling Real Estate Trust					$	4,148					$	5,797
Dividends per share (1)					$	0.7838					$	0.7631
Earnings per share					$	0.4500					$	0.6600
Weighted average number of common shares						9,208						8,730

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

Revenues

Property revenues of $90,275 for the nine months ended September 30, 2019 increased $3,473 or 4.0% in comparison to the same period in 2018. Residential property revenues increased $4,237 and commercial property revenues decreased $764, during the nine month period.

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

	September 30,		September 30,
	2019		2018
Residential occupancy	93.8	%	93.8	%
Commercial occupancy	91.8	%	92.7	%

Residential revenues for the nine months ended September 30, 2019 increased $4,237 in comparison to the same period for 2018.  Residential properties acquired since January 1, 2018 contributed approximately $2,353 to the increase in total residential revenues in the nine months ended September 30, 2019. The remaining increase is due increased rent charges at our stabilized properties, decreased vacancy, as well as increased collection efforts on receivable balances

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written off. Income related to Ratio Utility Billing System (RUBS) income in our Minneapolis market also contributed to the overall residential income increase. Residential revenues comprised 78.6% of total revenues for the nine months ended September 30, 2019 compared to 76.8% of total revenues for the nine months ended September 30, 2018.  Residential occupancy year-over-year has remained comparable increasing .01%.

For the nine months ended September 30, 2019, total commercial revenues decreased $764 in comparison to the same period for 2018. The decrease was primarily attributable to the sale of three commercial properties in 2018, as well as rental incentives recorded in 2019 for an office building in Fargo, North Dakota. Commercial revenues comprised 21.4% of the total revenues for the nine months ended September 30, 2019 compared to 23.2% of total revenues for the nine months ended September 30, 2018.  Commercial occupancy year-over-year has remained comparable, decreasing .91%. The decrease is primarily due to vacant office buildings located in both Waite Park, Minnesota and Fargo, North Dakota.

Expenses

Residential expenses from operations of $39,954 during the nine months ended September 30, 2019 increased $2,861 or 7.7% in comparison to the same period in 2018. The increase was primarily due to an increase in repairs and maintenance expense of $1,398 or 9.87%. Real estate taxes and utilities expense increases also contributed to the increase. Real estate taxes increased due to acquisitions occurring in Q4 2018, while utilities expense increase can be attributed to utility rate increases and performing upgrades to residential units prior to re-leasing. In addition, we experienced increases in property management fees. Actual property management fees remain unchanged and continue to approximate 5% of net collected rents; however, other property management related expenses have increased due to increased competition for labor.

Commercial expenses from operations of $5,485 during the nine months ended September 30, 2019 decreased $77 or 1.4% in comparison to the same period in 2018.   The decrease is attributable to decreased utilities expense of $222 or 19.88% due to the decreased utility costs at a commercial property in Fargo, ND, while it is undergoing reconstruction and renovation. The repairs and maintenance costs related to increased direct tenant billbacks of $119 or 100%, noted for the decrease in expenses for the three months ended, September 30, 2019, were offset by demolition costs of $129, that were recorded in the second quarter of 2019.

Interest expense of $13,819 during the nine months ended September 30, 2019 increased $187 in comparison to the same period in 2018 due to an increase in interest expense related to mortgage interest incurred on our acquired properties in the third and fourth quarters of 2018. Interest expense was approximately 15.3% and 15.7% of rental income for the nine months ended September 30, 2019 and 2018, respectively.

Depreciation and amortization expense of $16,213 for the nine months ended September 30, 2019 increased  $306 or 1.92% in comparison to the same period in 2018. The $306 increase was primarily a result of increases in depreciation and amortization expenses attributed to acquisitions in the third and fourth quarters of 2018.  Amortization expense will generally continue to decrease as lease intangibles become fully amortized except when acquisitions occur.   Depreciation and amortization expense as a percentage of rental income for the nine months ended September 30, 2019 and 2018 was relatively consistent at 18.0% and 18.3%, respectively.

Other income of $328 for the nine months ended September 30, 2019 decreased $6,088 or 94% in comparison to the same period in 2018.  The decrease was primarily attributed to disposition activity in the prior period that did not occur in the current period. During the nine months ended September 30, 2018 we recognized a gain on involuntary conversion of $1,467 and a gain on sale of real estate investments of $4,298. Due to the evaluation and analysis of a commercial property in Fargo, ND, it was determined that the future economic benefit of a portion of the property was determined to be non-recoverable. As such, during the three months ended September 30, 2019, we also experienced a loss on involuntary conversion of $816 due to the partial demolition of a commercial property located in Fargo, ND. Based on the facts and circumstances surrounding the demolition, we will not be recognizing insurance proceeds related to the loss. 

REIT administration expenses of $3,051 for the nine months ended September 30, 2019 decreased $652 or 17.63% in comparison to the same period in 2018, due to disposition fees recognized during the nine months ended September 30, 2018 of $583.

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Net Operating Income

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

Net Income

Net income for the nine months ended September 30, 2019was $12,081 compared to $17,321 for the nine months ended September 30, 2018.  During the nine months ended September 30, 2018, the Company recognized gains in other income totaling $5,765, as discussed above, which resulted in higher net income in the prior period than the current period. Operationally, the Company has seen increased income from operations of $689, which is attributed to the increased residential revenues during the 2019 period.

Property Acquisitions and Dispositions

See Notes 15 and 16 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the nine months ended September 30, 2019 and 2018.

Joint Venture

The operating partnership is a 60% owner of SE Savage, LLC (“SE Savage”). The operating partnership contributed $1,323 in cash to SE Savage in September 2019. As of September 30, 2019, the property owned by SE Savage consisted of land. It is SE Savage’s intent to develop a 190 unit multifamily property.

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,

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improving the understanding of operating results of REITs among the investing public and making it easier to compare the results of one REIT with another.

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

The following tables include calculations of FFO, and the reconciliations to net income, for the three and nine months ended September 30, 2019 and 2018, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

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

	Three months ended  September 30, 2019					Three months ended  September 30, 2018
			Weighted Avg	Per				Weighted Avg	Per
			Shares and	Share and				Shares and	Share and
	Amount		Units(1)	Unit (2)		Amount		Units(1)	Unit (2)
	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	1,213	9,322	$	0.13	$	2,379	8,840	$	0.27
Add back:
Noncontrolling Interest - OPU		2,312	17,822				4,739	17,556
Depreciation & Amortization from continuing operations		5,322					5,274
Depreciation & Amortization from discontinued operations		—					—
Pro rata share of unconsolidated affiliate depreciation & amortization		94					94
Loss on sale of depreciable real estate investments		—					—
Loss on impairment of real estate investments		—					—
Subtract:
Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		—					(3,214)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	8,941	27,144	$	0.33	$	9,272	26,396	$	0.35

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

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

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	Nine months ended September 30, 2019						Nine months ended September 30, 2018
			Weighted Avg	Per				Weighted Avg	Per
			Shares and	Share and				Shares and	Share and
	Amount		Units(1)	Unit (2)		Amount		Units(1)	Unit (2)
	(unaudited)
	(in thousands, except per share data)
Net Income attributable to Sterling Real Estate Trust	$	4,148	9,208	$	0.45	$	5,797	8,730	$	0.66
Add back:
Noncontrolling Interest - OPU		8,034	17,837				11,651	17,552
Depreciation & Amortization from continuing operations		16,213					15,907
Pro rata share of unconsolidated affiliate depreciation & amortization		284					282
Subtract:
Gain on sale of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments		—					(4,298)
Funds from operations applicable to common shares and limited partnership units (FFO)	$	28,679	27,045	$	1.06	$	29,339	26,282	$	1.12

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

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

FFO was impacted by the loss on involuntary conversion during the three and nine months ended September 30, 2019. The impact on FFO was a decrease of $0.03 and $0.018 per share, respectively. FFO was impacted by the gain on involuntary conversion during the three and nine months ended September 30, 2018. The impact on FFO was a gain of $0.0038 and $0.0558 per share.

Liquidity and Capital Resources

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

Evaluation of Liquidity

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

Credit Quality of Tenants

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

To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenant’s operations and have attempted to diversify our portfolio by tenant, tenant industry and geography.  We also monitor all of our properties performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with

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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

No significant leases are scheduled to expire or renew in the next twelve months.  The Advisor, with the assistance of our commercial property managers, actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where commercial tenants elect not to renew, we may seek replacement tenants or try to sell the property.

Cash Flow Analysis

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

	Nine Months Ended
	September 30,
	2019		2018
	(in thousands)
Net cash flows provided by operating activities	$	34,015	$	28,351
Net cash flows used in investing activities	$	(9,883)	$	(548)
Net cash flows used in financing activities	$	(32,097)	$	(17,248)

Operating Activities

Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance cost, and real estate taxes. Additionally, we incur general and administrative expenses, advisory fees, acquisition and disposition expenses and financing fees.

Net cash provided by operating activities was $34,015 and $28,351 for the nine months ended September 30, 2019 and 2018, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. The funds generated for the nine months ended September 30, 2019 and 2018 were primarily from property operations of our real estate portfolio.

Investing Activities

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

Net cash used in investing activities was $9,883 and $548 for the nine months ended September 30, 2019 and 2018, respectively (this does not include the value of UPREIT units issued in connection with investing activities).  For the nine months ended September 30, 2019 and 2018, cash flows used in investing activities related primarily to the 2018 acquisition of properties and capital expenditures was $10,258 and $14,718, respectively.  In addition, during the nine months ended September 30, 2019, a $1,300 revolving line of credit was made to an unrelated third party, which loan bears an interest rate of Prime Plus 2% or 7% as of September 30, 2019. In addition, during the nine months ended September 30, 2019 and 2018, proceeds of $1,513 and $1,111 were received from involuntary conversions.  During the nine months ended September 30, 2018, proceeds of $13,065 were generated from the sale of three commercial properties.

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Financing Activities

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

Net cash used in financing activities was $32,097 and $17,248 for the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019,  we paid $16,333 in dividends and distributions, redeemed $1,573 of shares and units, received no proceeds from new mortgage notes payable, and made mortgage principal payments of $16,330. For the nine months ended September 30, 2018, we paid $16,001 in dividends and distributions, redeemed $2,167 of shares and units, received proceeds from new mortgage notes payable of $10,281, and made mortgage principal payments of $12,028.

Dividends

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 2019 to September 30, 2019 totaling $7,216 or $0.78375 per share, of which $2,548 was cash dividends and $4,668 were reinvested through the dividend reinvestment plan.

We declared cash dividends to our shareholders during the period from January 1, 2018 to September 30, 2018 totaling $6,655 or $0.763125 per share, of which $2,317 was cash dividends and $4,338 were reinvested through the dividend reinvestment plan. 

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

The following table presents certain information regarding our dividend coverage:

	Nine Months Ended
	September 30,
	2019		2018
	(in thousands)
Cash flows provided by operations (includes net income of $12,081and $17,321, respectively)	$	34,015	$	28,351
Distributions in excess of earnings received from unconsolidated affiliates		(32)		88
Gain (Loss) on sales of real estate and non-real estate investments		—		4,298
Dividends declared		(7,216)		(6,655)
Excess	$	26,767	$	26,082

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 months ended September 30, 2019, we declared quarterly distributions totaling $13,973 to holders of limited partnership units in our operating partnership, which we paid on April 15, July 15, and October 15, 2019.  Distributions were paid at a rate of $0.261250 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

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For the nine months ended September 30, 2018, we declared quarterly distributions totaling $13,408 to holders of limited partnership units in our operating partnership, which we paid on April 16 and July 16, and October 15, 2018. Distributions were paid at a rate of $0.254375 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.

Sources of Dividends

For the nine months ended September 30, 2019, we declared aggregate dividends of $7,216, which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our funds from operations, or FFO, was $28,679;  therefore, our management believes our distribution policy is sustainable over time. For the nine months ended September 30, 2018, we declared aggregate dividends of $6,655 which were paid with cash flows provided by operating activities and distributions from unconsolidated affiliates. Our FFO was $29,339 as of the nine months ended September 30, 2018. For a further discussion of FFO, including a reconciliation of FFO to net income, see “Funds from Operations” above.

Cash Resources

At September 30, 2019, our cash resources consisted of cash and cash equivalents totaling approximately $13,685. Our cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of $43,335, which could potentially be used as collateral to secure additional financing in future periods. 

At September 30, 2019, there was no balance outstanding on our lines of credit, leaving $32,815 available and unused under the agreements.  See Note 5 to the accompanying consolidated financial statements for additional details regarding our line of credit agreements.

The sale of our securities and issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the nine months ended September 30, 2019, we did not sell any common shares in a private placement. During the nine months ended September 30, 2019, we issued 255,000 and 127,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively, and raised gross proceeds of $7,003.  During the nine months ended September 30, 2018, we did not sell any common shares in a private placement.  During the nine months ended September 30, 2018, we issued 243,000 and 166,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively, and raised gross proceeds of $7,336.

During the nine months ended September 30, 2019, no partnership units were issued in relation to property acquisitions.

During the nine months ended September 30, 2018, we issued limited partnership units valued at approximately $2,176 in connection with the acquisition of of one property.

Off-Balance Sheet Arrangements

As of September 30, 2019 and December 31, 2018, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation

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

As of September 30, 2019, most of our commercial leases require tenants to pay directly or reimburse us for a share of our operating expenses.  As a result, we are able to pass on much of any increases to our property operating

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expenses that might occur due to inflation by correspondingly increasing our expense reimbursement revenues.  During the nine months ended September 30, 2019, inflation did not have a material impact on our revenues or net income.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The principal material financial market risk to which we are exposed is interest-rate risk.  Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate lines of credit.

As virtually all of our outstanding debt is long-term, fixed rate debt, our interest rate risk has not changed significantly from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 15, 2019. 

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, 2019, 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 fiscal quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

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

Sale of Securities 

Neither Sterling nor the operating partnership issued any unregistered securities during the three months ended September 30, 2019. 

Other Sales

During the three months ended September 30, 2019, 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 pursuant to Section 4 (a) (2) and Rule 506 of Regulation D.

Redemptions of Securities 

Set forth below is information regarding common shares and limited partnership units redeemed during the nine months ended September 30, 2019:

			Average		Total Number of	Total Number of	Approximate Dollar Value of
	Total Number	Total Number	Price		Shares Redeemed	Units Redeemed	Shares (or Units) that May
	of Common	of Limited	Paid per		as Part of	as Part of	Yet Be Redeemed Under
	Shares	Partner Units	Common		Publicly Announced	Publicly Announced	Publicly Announced
Period	Redeemed	Redeemed	Share/Unit		Plans or Programs	Plans or Programs	Plans or Programs
January 1-31, 2019	3,000	5,000	$	18.00	1,190,000	774,000	$	7,743
February 1-28, 2019	2,000	3,000	$	18.00	1,192,000	777,000	$	7,655
March 1-31, 2019	6,000	27,000	$	18.00	1,198,000	804,000	$	7,059
Total	11,000	35,000
April 1-30, 2019	4,000	5,000	$	18.00	1,202,000	809,000	$	6,905
May 1-31, 2019	2,000	8,000	$	18.00	1,204,000	817,000	$	6,728
June 1-30, 2019	3,000	3,000	$	18.00	1,207,000	820,000	$	6,632
Total	9,000	16,000
July 1-31, 2019	5,000	2,000	$	18.00	1,212,000	822,000	$	6,506
August 1-31, 2019	8,000	2,000	$	18.00	1,220,000	824,000	$	6,335
September 1-30, 2019	—	1,000	$	18.00	1,220,000	825,000	$	6,312
Total	13,000	5,000

For the three months ended September 30, 2019, we redeemed all shares or units for which we received redemption requests.  In addition, for the three months ended September 30, 2019, all common shares and units redeemed were redeemed as part of the publicly announced plans.

The Amended and Restated Share Redemption Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our operating partnership, up to a maximum amount of $35,000 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 redemption price for such shares and units redeemed under the plan was fixed at $17.50 per share or unit, which was increased to $18.00 effective January 1, 2019. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plan at any time if it determines to do so is in our best interest.

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Item 6.  Exhibits.

Exhibit
Number	Title of Document
10.1	Amendment No. 1 to the Eigth amended and Restated Advisory agreement effective September 1, 2019 (incorporated by reference to Exhibit No.10.1 to the Company’s Current Report on Form 8-k filed September 25, 2019).
31.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the of the Sarbanes-Oxley Act of 2002.
101	The following materials from Sterling Real Estate Trust’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended September 30, 2019 and 2018; (iii) Consolidated Statements of Shareholders’ Equity for the three and nine months ended June 30, 2019; (iv) Consolidated Statements of Cash Flows for the nine months ended June 30, 2019 and 2018, and; (v) Notes to Consolidated Financial Statements.

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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 8, 2019

STERLING REAL ESTATE TRUST
By:	/s/ Kenneth P. Regan
	Kenneth P. Regan
	Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Erica J. Chaffee
	Erica J. Chaffee
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

OFFICER'S CERTIFICATE

PURSUANT TO SECTION 302

I, Kenneth P. Regan, certify that:

1.           I have reviewed this quarterly report on Form 10-Q for Sterling Real Estate Trust.

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;

4.           I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-5(e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)        Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:    November  8, 2019

By:	/s/ Kenneth P. Regan
	Chief Executive Officer

EX-31.2

Exhibit 31.2

OFFICER'S CERTIFICATE

PURSUANT TO SECTION 302

I, Erica J. Chaffee, certify that:

1.           I have reviewed this quarterly report on Form 10-Q for Sterling Real Estate Trust.

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;

4.           I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-5(e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)        Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:    November  8, 2019

By:	/s/ Erica J. Chaffee
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sterling Real Estate Trust (the “Company”) on Form 10-Q for the period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.      The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.      The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated:   November  8, 2019	By:	/s/ Kenneth P. Regan
		Chief Executive Officer
	By:	/s/ Erica J. Chaffee
		Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Sterling Real Estate Trust and will be retained by Sterling Real Estate Trust and furnished to the Securities and Exchange Commission or its staff upon request.

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DISPOSITIONS

9 Months Ended

Sep. 30, 2019

DISPOSITIONS

DISPOSITIONS

NOTE 15 – DISPOSITIONS

During the nine months ended September 30, 2019, the operating partnership did not dispose of any properties. During the nine months ended September 30, 2018, the operating partnership sold three properties. We sold an industrial property located in Redwood Falls, Minnesota for $5,200 and recognized a gain of $935 in April 2018. We sold a retail property located in Austin, Texas for $3,615 and recognized a gain of $1,266 in July 2018. We sold one of two buildings included in an office property located in Bismarck, North Dakota for $4,250 and recognized a gain of $1,514 in July 2018.

XML

PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2019

PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Schedule of Types of Real Estate Properties by Location

Residential Property	Location	No. of Properties	Units
	North Dakota	105	6,160
	Minnesota	16	3,033
	Missouri	1	164
	Nebraska	3	495
		125	9,852
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	15	680,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		48	1,662,000

Summary of Estimated Useful Life

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

Schedule of Lease Income related to the Company's Operating Leases

	Nine months ended September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	68,938	$	14,675	$	83,613
Lease income related to variable lease payments		—		4,570		4,570
Other (a)		(706)		55		(651)
Lease Income (b)	$	68,232	$	19,300	$	87,532

(a) For the nine months ended September 30, 2019, “Other” is comprised of revenue adjustments related to changes in collectibility and amortization of above and below market lease intangibles and lease inducements.

(b) Excludes other rental income for the nine months ended September 30, 2019 of $2,743, which is accounted for under the revenue recognition standard.

	Three months ended  September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	23,064	$	4,969	$	28,033
Lease income related to variable lease payments		—		1,531		1,531
Other (a)		(301)		(27)		(328)
Lease Income (b)	$	22,763	$	6,473	$	29,236

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

(b) Excludes other rental income for the three months ended September 30, 2019 of $937, which is accounted for under the revenue recognition standard.

Schedule of Future Minimum Rental Income

Years ending December 31,	Amount
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	4,652
2020		17,578
2021		14,333
2022		10,958
2023		9,205
Thereafter		51,699
	$	108,425

XML

Mortgage Notes Payable - Scheduled Maturities of Mortgage Notes Payable (Details) $ in Thousands	Sep. 30, 2019 USD ($)
MORTGAGE NOTES PAYABLE
2019 (July 1, 2019 to December 31, 2019)	$ 9,281
2020	28,011
2021	46,541
2022	31,788
2023	48,046
Thereafter	228,342
Total payments	$ 392,009

XML

Lease Intangibles - Schedule of Intangible Assets and Liabilities and Accumulated Amortization (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Intangible Assets
Lease Intangibles	$ 24,691	$ 24,691
Accumulated Amortization	(15,124)	(13,715)
Total	9,567	10,976
Intangible Liabilities
Below-market lease	(3,088)	(3,089)
Below-market lease, accumulated amortization	1,819	1,621
Below-market lease, net	(1,269)	(1,468)
In-place leases
Intangible Assets
Lease Intangibles	21,480	21,480
Accumulated Amortization	(13,671)	(12,422)
Total	7,809	9,058
Above-market leases
Intangible Assets
Lease Intangibles	3,211	3,211
Accumulated Amortization	(1,453)	(1,293)
Total	$ 1,758	$ 1,918

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Acquisitions - Purchases, Prior Year (Details) $ / shares in Units, $ in Thousands				9 Months Ended
	Sep. 17, 2018 USD ($) ft²	Sep. 01, 2018 USD ($) item	Mar. 01, 2018 USD ($) item	Sep. 30, 2019 USD ($) property	Sep. 30, 2018 USD ($) $ / shares shares
BUSINESS COMBINATIONS AND ACQUISITIONS
Number of acquisitions | property				0
Acquisition price				$ 8,090
Aggregate number of limited partnership units issued for acquisition | shares					118,000
Price per limited partnership unit issued for acquisition, price one | $ / shares					$ 18.50
Aggregate value of limited partnership units issued for acquisition					$ 2,176
Assumed liabilities					71
1031 tax-deferred exchange funds					3,004
Consideration in cash to pay for acquisitions					$ 3,075
Thunder Creek Apartments, Fargo, ND
BUSINESS COMBINATIONS AND ACQUISITIONS
Units acquired | item			57
Acquisition price			$ 4,460
Chandler 1834, Grand Forks, ND
BUSINESS COMBINATIONS AND ACQUISITIONS
Units acquired | item		12
Acquisition price		$ 630
Dairy Queen, Apple Valley, MN
BUSINESS COMBINATIONS AND ACQUISITIONS
Area of the property purchased | ft²	5,348
Acquisition price	$ 3,000
Capitalized closing costs and adjustments	$ 236

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Fair Value Measurement - Additional Information (Details)	Sep. 30, 2019	Dec. 31, 2018
Minimum
Fair Value Disclosures
Discount rates used to estimate fair value of mortgages and notes payable	3.60	4.82
Maximum
Fair Value Disclosures
Discount rates used to estimate fair value of mortgages and notes payable	3.60	4.83

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Dividend Reinvestment Plan - Additional Information (Details) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018	Jul. 11, 2017	Jul. 20, 2012
DIVIDEND REINVESTMENT PLAN
Common shares to be issued				2,000,000	2,000,000
Minimum percentage of cash dividends	25.00%
Maximum additional cash purchase of common shares per fiscal quarter	$ 10
Percentage estimated value for dividend reinvestments	95.00%
Percentage estimated value for additional optional cash purchases	100.00%
Maximum amount of optional additional shares available for purchase	$ 40
Estimated value per common share	$ 19.00		$ 18.50
Purchase price per common share for dividend reinvestments	18.05		17.580
Purchase price per common share additional optional cash purchases	$ 19.00		$ 18.50
Notice period to participants	10 days
Shares issued pursuant to dividend reinvestments	255,000	243,000
Shares were issued pursuant to additional optional cash purchases under the plan	127,000	166,000

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CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income from rental operations
Income from rental operations	$ 30,173	$ 29,055	$ 90,275	$ 86,802
Expenses from rental operations
Operating expenses, excluding real estate taxes	12,344	11,311	36,355	34,022
Real estate taxes	3,036	2,889	9,084	8,633
Depreciation and amortization	5,322	5,274	16,213	15,907
Interest	4,521	4,557	13,819	13,632
Total expenses from rental operations	25,223	24,031	75,471	72,194
Administration of REIT
Administration of REIT	969	1,460	3,051	3,703
Total expenses	26,192	25,491	78,522	75,897
Income from operations	3,981	3,564	11,753	10,905
Other income
Equity in income of unconsolidated affiliates	235	161	629	445
Other income	70	45	186	206
Gain on sale of real estate and non-real estate investments		3,214		4,298
(Loss)/gain on involuntary conversion	(816)	100	(487)	1,467
Total other income (expense)	(511)	3,520	328	6,416
Net income	3,470	7,084	12,081	17,321
Net income attributable to noncontrolling interest in operating partnership	2,312	4,739	8,034	11,651
Net income attributable to noncontrolling interest in partially owned properties	(55)	(34)	(101)	(127)
Net income attributable to Sterling Real Estate Trust	$ 1,213	$ 2,379	$ 4,148	$ 5,797
Net income per common share, basic and diluted	$ 0.13	$ 0.27	$ 0.45	$ 0.66
Comprehensive income:
Net income	$ 3,470	$ 7,084	$ 12,081	$ 17,321
Other comprehensive gain - change in fair value of interest rate swaps	6	8	14	32
Comprehensive income	3,476	7,092	12,095	17,353
Comprehensive income attributable to noncontrolling interest	2,261	4,710	7,942	11,546
Comprehensive income attributable to Sterling Real Estate Trust	1,215	2,382	4,153	5,807
Real Estate Rental Income
Income from rental operations
Income from rental operations	$ 30,173	27,591	$ 90,275	82,205
Tenant Reimbursements
Income from rental operations
Income from rental operations		$ 1,464		$ 4,597

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ORGANIZATION

9 Months Ended

Sep. 30, 2019

ORGANIZATION

ORGANIZATION

Note 1 - Organization

Sterling Real Estate Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002.  Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, 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. 

Sterling previously established an operating partnership (“Sterling Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of September 30, 2019 and December 31, 2018, Sterling owned approximately 34.34% and 33.41%, respectively, of the operating partnership.

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SEGMENT REPORTING

9 Months Ended

Sep. 30, 2019

SEGMENT REPORTING

SEGMENT REPORTING

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

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and nine months ended September 30, 2019 and 2018, 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, 2019						Three months ended  September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	23,662	$	6,511	$	30,173	$	22,439	$	6,616	$	29,055
Expenses from rental operations		13,570		1,810		15,380		12,247		1,953		14,200
Net operating income	$	10,092	$	4,701	$	14,793	$	10,192	$	4,663	$	14,855
Depreciation and amortization						5,322						5,274
Interest						4,521						4,557
Administration of REIT						969						1,460
Other (income)/expense						511						(3,520)
Net income					$	3,470					$	7,084

	Nine months ended September 30, 2019						Nine months ended September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	70,920	$	19,355	$	90,275	$	66,683	$	20,119	$	86,802
Expenses from rental operations		39,954		5,485		45,439		37,093		5,562		42,655
Net operating income	$	30,966	$	13,870	$	44,836	$	29,590	$	14,557	$	44,147
Depreciation and amortization						16,213						15,907
Interest						13,819						13,632
Administration of REIT						3,051						3,703
Other (income)/expense						(328)						(6,416)
Net income					$	12,081					$	17,321

Segment Assets and Accumulated Depreciation

As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	601,574	$	194,903	$	796,477
Accumulated depreciation		(100,837)		(40,893)		(141,730)
	$	500,737	$	154,010		654,747
Cash and cash equivalents						13,685
Restricted deposits and funded reserves						8,415
Investment in unconsolidated affiliates						4,046
Other assets						7,558
Intangible assets, less accumulated amortization						9,567
Total Assets					$	698,018

As of December 31, 2018	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	595,006	$	195,690	$	790,696
Accumulated depreciation		(90,143)		(37,969)		(128,112)
	$	504,863	$	157,721		662,584
Cash and cash equivalents						21,212
Restricted deposits and funded reserves						8,853
Investment in unconsolidated affiliates						2,691
Other assets						8,151
Intangible assets, less accumulated amortization						10,976
Total Assets					$	714,467

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HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2019

HEDGING ACTIVITIES

HEDGING ACTIVITIES

NOTE 7 – HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we have used derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings. To meet these objectives, we entered into an interest rate swap in the notional amount of $1,294 to provide a fixed rate of 7.25% that matures in April 2020.  The swap was issued at approximate market terms and thus no fair value adjustment was recorded at inception.

The carrying amount of the swap has been adjusted to its fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps.  The interest rate swap is accounted for as an effective hedge in accordance with FASB ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to accumulated comprehensive income. As of September 30, 2019 and December 31, 2018, we recorded a liability and other accumulated comprehensive loss of $16 and $30, respectively.

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BENEFICIAL INTEREST

9 Months Ended

Sep. 30, 2019

BENEFICIAL INTEREST

BENEFICIAL INTEREST

NOTE 11 – BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the entire beneficial interest of Sterling. As of September 30, 2019 and December 31, 2018, there were 9,320,000 and 8,967,000 common shares outstanding, respectively. We had no preferred shares outstanding as of either date.

For the three months ended September 30, 2019 and 2018, the operating partnership declared dividends of $2,435 and $2,248 respectively, to holders of commons shares which were paid on October 15, 2019 and 2018, respectively. Dividends paid to holders of common shares were $0.78375 per share and $0.763125 per share for the nine months ended September 30, 2019 and 2018, respectively.

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Principal Activity and Significant Accounting Policies - Other (Details) - USD ($) $ in Thousands	9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Impairment of lease intangible assets	$ 0		$ 0
Taxable income to be distributed	90.00%
Retainable taxable income	10.00%
Provisions or liabilities for income taxes	$ 0	$ 0

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Organization - Additional Information (Details)	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Properties
Ownership in operating partnership	34.34%	33.41%
Real Estate
Properties
Percentage of total assets that must consist of real estate assets per the Internal Revenue Code election to be treated as REIT	75.00%
Percentage of total gross income that must be derived from real estate per the Internal Revenue Code election to be treated as REIT	75.00%

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Noncontrolling Interest of Unitholders in Operating Partnership - Additional Information (Details) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($) shares	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) item $ / shares shares	Sep. 30, 2018 $ / shares shares	Dec. 31, 2018 shares
Noncontrolling Interest
Distributions per unit | $ / shares			$ 0.78375	$ 0.763125
Maximum
Noncontrolling Interest
Number of permitted exchange requests in a calendar year | item			2
Limited Partnership
Noncontrolling Interest
Total units	17,820,000		17,820,000		17,876,000
Units converted by limited partners into common shares			1,475	0
Total units			1,475
Common shares value | $			$ 28
Limited Partnership | Minimum
Noncontrolling Interest
Number of units which can be redeemed in single redemption			1,000
Operating Partnership
Noncontrolling Interest
Declared distributions | $	$ 4,655	$ 4,470

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Related Party Transactions - Property Management and Board of Trustee Fees (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Related Party Transactions
Trustee fees	$ 44	$ 53
Unpaid board of trustee fees	$ 15		$ 34
GOLDMARK Property Management
Related Party Transactions
Property management fee, percent fee	5.00%	5.00%
Management fee, amount paid	$ 9,530	$ 8,934
Repair and maintenance related payroll and payroll related expenses	$ 4,664	$ 3,921
Board Chairman - Board Meeting
Related Party Transactions
Shares received by board members per meeting	105
Trustee - Board Meeting
Related Party Transactions
Shares received by board members per meeting	75
Committee Chair – Committee Meeting
Related Party Transactions
Shares received by board members per meeting	30
Trustee – Committee Meeting
Related Party Transactions
Shares received by board members per meeting	30

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PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2019

PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

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, 2018, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2019 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 2019 and 2018, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and nine months ended September 30, 2019. These adjustments are of a normal recurring nature.

Principles of Consolidation

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

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.

Principal Business Activity

Sterling currently owns directly and indirectly 173 properties.  The Trust’s 125 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings.  The Trust owns 48 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties.  Presently, the Trust’s mix of properties is 73.3% residential and 26.7% commercial (based on cost) and total $654,747 in real estate investments at September 30, 2019. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.  We currently have no plans to actively market our existing commercial properties for sale.  We will consider unsolicited offers for purchase of non-multifamily properties on a case by case basis. Prior to June 30, 2019, Sterling did not account for mezzanine and storage space square footage on their commercial properties. As of June 30, 2019 the addition to this space led to an additional 36,000 square feet of commercial property.

Residential Property	Location	No. of Properties	Units
	North Dakota	105	6,160
	Minnesota	16	3,033
	Missouri	1	164
	Nebraska	3	495
		125	9,852
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	15	680,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		48	1,662,000

Concentration of Credit Risk

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

Use of Estimates

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

Real Estate Investments

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

The Company allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market, and (vi) goodwill, if any. Transaction costs related to acquisitions accounted for as asset acquisitions are expensed as incurred and included within “Administration of REIT expenses” in the accompanying consolidated statements of operations and other comprehensive income.

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

The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Company incurred amortization expense pertaining to acquired in-place lease value intangibles of $401 and $473for the three months ended September 30, 2019 and 2018, respectively and $1,249 and $1,516 for the nine months ended September 30, 2019 and 2018, respectively.

The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $54 and $55 for the three months ended September 30, 2019 and 2018, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $65 and $68 for the three months ended September 30, 2019 and 2018, respectively, was recorded as an increase to real estate rental income.  Amortization pertaining to above market lease intangibles of $160 and $166 for the nine months ended September 30, 2019 and 2018, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $198 and $208 for the nine months ended September 30, 2019 and 2018, respectively, was recorded as an increase to real estate rental income.

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

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

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

Depreciation expense for the three months ended September 30, 2019 and 2018 totaled $4,879 and $4,761, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 totaled $14,785 and $14,267, respectively.

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

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

· a substantial decline or continued low occupancy rate;

· continued difficulty in leasing space;

· significant financially troubled tenants;

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

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

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

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

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

· projected capital expenditures and lease origination costs;

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

· comparable selling prices; and

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

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties.  There were no impairment losses during the nine months ended September 30, 2019 and 2018.    

Properties Held for Sale

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

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

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

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

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

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

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

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

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

There were no properties classified as held for sale at September 30, 2019 or at December 31, 2018.  

Construction in Progress

The Company 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, 2019 consists primarily of development and planning costs associated with the Glen Pond development in Eagan, Minnesota and the Goldmark Office Park 1715 building located in Fargo, North Dakota. The Glen Pond development consists of 114 units of multifamily property. Current expectations are that the project will be completed in the second or third quarter of calendar year 2020 and the current project budget approximates $15,598. The Goldmark Office Park 1715 building is a commercial office building. Current expectations are that the project will be completed in the fourth quarter of calendar year 2019 and the current project budget is approximately $2,000.

Cash, Cash Equivalents and Restricted Deposits

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

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under FASB ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings, contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with FASB ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the nine months ended September 30, 2019 and 2018.  

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

In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns.  As of September 30, 2019, our tenant in common arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. As of September 30, 2019, our investment in the joint venture does not qualify as a variable interest entity, does not meet the control requirements for consolidation or significant influence requirements, as defined in ASC 810, and does meet the definition of a joint venture.

As of September 30, 2019 and December 31, 2018, the unconsolidated affiliates held total assets of $24,710 and $22,954 and mortgage notes payable of $16,793 and $17,091, respectively.

The operating partnership is a 50% owner of a retail center as a tenant in common through 100% ownership in a limited liability company.  The retail center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2019 and December 31, 2018 of $10,320 and $10,483, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2019 and December 31, 2018 of $6,473 and $6,608, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 60% interest in a joint venture (“SE Savage”) that intends to develop a 190 unit multifamily property. The operating partnership has contributed $1,323 in cash to SE Savage during September 2019. SE Savage holds land located in Savage, Minnesota, total assets of $2,205, and no mortgage payable.  

Receivables

Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, beginning with the adoption of ASC 842 as of January 1, 2019, the operating partnership recognizes an adjustment to rental income. Prior to the adoption of ASC 842, The Company recognized a provision for uncollectible amounts or a direct write-off of the specific rent receivable.

Notes receivable are issued periodically and are secured and interest bearing. Receivables are included in “Other assets” in the accompanying consolidated balance sheets.

Financing and Lease Costs

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

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

Debt Issuance Costs

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

Lease Intangible Assets

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

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no impairment charges were necessary at September 30, 2019 and December 31, 2018.

Noncontrolling Interest

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

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

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

Syndication Costs

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

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in generally the same manner as they are taxed on other corporate distributions.

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

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP.  The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We follow FASB ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 2019 and December 31, 2018 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 2015.

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

Revenue Recognition

We are the lessor for our residential and commercial leases and these leases will continue to be accounted for as operating leases under the new standard as described under Recent Accounting Pronouncements.  Therefore, the Company did not have significant changes in accounting for lease revenues.

As of September 30, 2019, we derived 83% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same.  The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis.  Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of September 30, 2019, we derived 17% of our revenues from commercial leases primarily under long-term lease agreements. We elected to apply the package of practical expedients for the commercial leases and these leases will continue to be accounted for as operating leases as of January 1, 2019.  Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

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

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment decreased revenue by $39 and increased revenue by $17 for the three months ended September 30, 2019 and 2018, respectively. The straight-line rent adjustment increased revenue by $17 and $87 the nine months ended September 30, 2019 and 2018, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, 2019 and December 31, 2018 was $3,391 and $3,374, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

Upon adoption of ASU 2016-02 on January 1, 2019, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease component is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental income” beginning January 1, 2019 in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental income.

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

	Nine months ended September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	68,938	$	14,675	$	83,613
Lease income related to variable lease payments		—		4,570		4,570
Other (a)		(706)		55		(651)
Lease Income (b)	$	68,232	$	19,300	$	87,532

(a) For the nine months ended September 30, 2019, “Other” is comprised of revenue adjustments related to changes in collectibility and amortization of above and below market lease intangibles and lease inducements.

(b) Excludes other rental income for the nine months ended September 30, 2019 of $2,743, which is accounted for under the revenue recognition standard.

	Three months ended  September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	23,064	$	4,969	$	28,033
Lease income related to variable lease payments		—		1,531		1,531
Other (a)		(301)		(27)		(328)
Lease Income (b)	$	22,763	$	6,473	$	29,236

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

(b) Excludes other rental income for the three months ended September 30, 2019 of $937, which is accounted for under the revenue recognition standard.

As of September 30, 2019, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.

Years ending December 31,	Amount
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	4,652
2020		17,578
2021		14,333
2022		10,958
2023		9,205
Thereafter		51,699
	$	108,425

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 as of September 30, 2019 and 2018, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the three months ended September 30, 2019 and 2018, Sterling’s denominators for both basic and diluted earnings per common share were approximately 9,322,000 and 8,840,000, respectively. For the nine months ended September 30, 2019 and 2018, Sterling’s denominators for the basic and diluted earnings per common share were approximately 9,208,000 and 8,730,000, respectively.

Reclassifications

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

Recent Accounting Pronouncements

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

The new standard was effective for the Company effective January 1, 2019. The new standard was adopted using the optional transition method to apply the standard as of the effective date. The Company elected to apply the package of practical expedients for the leases as lessor for its residential and commercial leases and these leases will continue to be accounted for as operating leases as of the effective date. Further, the Company elected the practical expedient to combine lease and nonlease components for leases as lessor. Finally, the Company evaluated taxes collected from lessees, lessor costs paid directly by lessees, and initial direct costs and determined that the guidance was consistent with existing practice. Based on these evaluations, the Company determined that for leases as lessor, as of January 1, 2019, there was no impact on lease revenue or related expenses.

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

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 04, 2019
Document And Entity Information [Abstract]
Entity Registrant Name	Sterling Real Estate Trust
Entity Central Index Key	0001412502
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		9,448,754.77
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3

XML

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($) $ in Thousands	Common Shares	Paid-in Capital	Accumulated Distributions in Excess of Earnings	Total Beneficial Interest	Noncontrolling Interest in Operating Partnership	Noncontrolling Interest in Partially Owned Properties	Accumulated Other Comprehensive Income (Loss)	Total
Beginning Balance at Dec. 31, 2017	$ 8,488	$ 113,995	$ (23,179)	$ 90,816	$ 179,844	$ 3,180	$ (65)	$ 273,775
Contribution of assets in exchange for the issuance of noncontrolling interest shares					1,546			1,546
Shares/units redeemed		(614)		(614)	(316)			(930)
Shares/units redeemed (in shares)	(35,000)
Dividends declared			(2,190)	(2,190)	(4,473)			(6,663)
Dividends reinvested - stock dividend		1,373		1,373				1,373
Dividends reinvested - stock dividend (in shares)	79,000
Issuance of shares under optional purchase plan		1,411		1,411				1,411
Issuance of shares under optional purchase plan (in shares)	76,000
Change in fair value of interest rate swaps							14	14
Net income			1,741	1,741	3,536	(19)		5,258
Ending balance at Mar. 31, 2018		116,165	(23,628)	92,537	180,137	3,161	(51)	275,784
Ending balance (in shares) at Mar. 31, 2018	8,608,000
Beginning Balance at Dec. 31, 2017	$ 8,488	113,995	(23,179)	90,816	179,844	3,180	(65)	$ 273,775
Dividends reinvested - stock dividend (in shares)								243,000
Change in fair value of interest rate swaps								$ 32
Net income								17,321
Ending balance at Sep. 30, 2018		120,289	(24,037)	96,252	179,195	2,576	(33)	277,990
Ending balance (in shares) at Sep. 30, 2018	8,837,000
Beginning Balance at Mar. 31, 2018		116,165	(23,628)	92,537	180,137	3,161	(51)	275,784
Beginning Balance (in shares) at Mar. 31, 2018	8,608,000
Shares/units redeemed		(244)		(244)	(489)			(733)
Shares/units redeemed (in shares)	(14,000)
Dividends declared			(2,217)	(2,217)	(4,465)			(6,682)
Dividends reinvested - stock dividend		1,425		1,425				1,425
Dividends reinvested - stock dividend (in shares)	81,000
Issuance of shares under optional purchase plan		747		747				747
Issuance of shares under optional purchase plan (in shares)	40,000
Change in fair value of interest rate swaps							10	10
Net income			1,677	1,677	3,376	(74)		4,979
Ending balance at Jun. 30, 2018		118,093	(24,168)	93,925	178,559	3,087	(41)	275,530
Ending balance (in shares) at Jun. 30, 2018	8,715,000
Shares issued under trustee compensation plan		57		57				57
Shares issued under trustee compensation plan (in shares)	3,000
Contribution of assets in exchange for the issuance of noncontrolling interest shares					630			630
Shares/units redeemed		(241)		(241)	(263)			(504)
Shares/units redeemed (in shares)	(14,000)
Dividends declared			(2,248)	(2,248)	(4,470)			(6,718)
Dividends reinvested - stock dividend		1,458		1,458				1,458
Dividends reinvested - stock dividend (in shares)	83,000
Issuance of shares under optional purchase plan		922		922				922
Issuance of shares under optional purchase plan (in shares)	50,000
Change in fair value of interest rate swaps							8	8
Distributions paid to consolidated real estate entity noncontrolling interests						(477)		(477)
Net income			2,379	2,379	4,739	(34)		7,084
Ending balance at Sep. 30, 2018		120,289	(24,037)	96,252	179,195	2,576	(33)	277,990
Ending balance (in shares) at Sep. 30, 2018	8,837,000
Beginning Balance at Dec. 31, 2018		122,624	(24,741)	97,883	183,360	2,538	(30)	$ 283,751
Beginning Balance (in shares) at Dec. 31, 2018	8,967,000							8,967,000
Shares/units redeemed		(197)		(197)	(629)			$ (826)
Shares/units redeemed (in shares)	(11,000)
Dividends declared			(2,374)	(2,374)	(4,661)			(7,035)
Dividends reinvested - stock dividend		1,479		1,479				1,479
Dividends reinvested - stock dividend (in shares)	82,000
Issuance of shares under optional purchase plan		929		929				929
Issuance of shares under optional purchase plan (in shares)	49,000
Change in fair value of interest rate swaps							4	4
Net income			1,288	1,288	2,532	(30)		3,790
Ending balance at Mar. 31, 2019		124,835	(25,827)	99,008	180,602	2,508	(26)	282,092
Ending balance (in shares) at Mar. 31, 2019	9,087,000
Beginning Balance at Dec. 31, 2018		122,624	(24,741)	97,883	183,360	2,538	(30)	$ 283,751
Beginning Balance (in shares) at Dec. 31, 2018	8,967,000							8,967,000
Dividends reinvested - stock dividend (in shares)								255,000
Change in fair value of interest rate swaps								$ 14
Net income								12,081
Ending balance at Sep. 30, 2019		129,123	(27,809)	101,314	176,413	2,437	(16)	$ 280,148
Ending balance (in shares) at Sep. 30, 2019	9,320,000							9,320,000
Beginning Balance at Mar. 31, 2019		124,835	(25,827)	99,008	180,602	2,508	(26)	$ 282,092
Beginning Balance (in shares) at Mar. 31, 2019	9,087,000
Shares/units redeemed		(154)		(154)	(272)			(426)
Shares/units redeemed (in shares)	(9,000)
Dividends declared			(2,407)	(2,407)	(4,657)			(7,064)
Dividends reinvested - stock dividend		1,554		1,554				1,554
Dividends reinvested - stock dividend (in shares)	86,000
Issuance of shares under optional purchase plan		795		795				795
Issuance of shares under optional purchase plan (in shares)	42,000
Change in fair value of interest rate swaps							4	4
Net income			1,647	1,647	3,190	(16)		4,821
Ending balance at Jun. 30, 2019		127,030	(26,587)	100,443	178,863	2,492	(22)	281,776
Ending balance (in shares) at Jun. 30, 2019	9,206,000
Shares issued under trustee compensation plan		62		62				62
Shares issued under trustee compensation plan (in shares)	3,000
Shares/units redeemed		(242)		(242)	(79)			(321)
Shares/units redeemed (in shares)	(13,000)
Dividends declared			(2,435)	(2,435)	(4,655)			(7,090)
Dividends reinvested - stock dividend		1,558		1,558				1,558
Dividends reinvested - stock dividend (in shares)	87,000
Issuance of shares under optional purchase plan		687		687				687
Issuance of shares under optional purchase plan (in shares)	36,000
UPREIT units converted to REIT common shares		28		28	(28)
UPREIT units converted to REIT common shares (in shares)	1,000
Change in fair value of interest rate swaps							6	6
Net income			1,213	1,213	2,312	(55)		3,470
Ending balance at Sep. 30, 2019		$ 129,123	$ (27,809)	$ 101,314	$ 176,413	$ 2,437	$ (16)	$ 280,148
Ending balance (in shares) at Sep. 30, 2019	9,320,000							9,320,000

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DIVIDEND REINVESTMENT PLAN

9 Months Ended

Sep. 30, 2019

DIVIDEND REINVESTMENT PLAN

DIVIDEND REINVESTMENT PLAN

NOTE 12 – DIVIDEND REINVESTMENT PLAN

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

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

The estimated value per common share was $19.00 and $18.50 at September 30, 2019 and December 31, 2018, respectively. See discussion of determination of estimated value in Note 16.

Therefore, the purchase price per common share for dividend reinvestments was $18.05 and $17.58 and for additional optional cash purchases was $19.00 and $18.50 at September 30, 2019 and December 31, 2018, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten-day notice to participants.

In the nine months ended September 30, 2019,  255,000 shares were issued pursuant to dividend reinvestments and 127,000 shares were issued pursuant to additional optional cash purchases under the plan.  In the nine months ended September 30, 2018,  243,000 shares were issued pursuant to dividend reinvestments and 166,000 shares were issued pursuant to additional optional cash purchases under the plan. 

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LEASE INTANGIBLES

9 Months Ended

Sep. 30, 2019

LEASE INTANGIBLES

LEASE INTANGIBLES

NOTE 4 - Lease intangibles

The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:

	Lease		Accumulated		Lease
As of September 30, 2019	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	21,480	$	(13,671)	$	7,809
Above-market leases		3,211		(1,453)		1,758
	$	24,691	$	(15,124)	$	9,567
Lease Intangible Liabilities
Below-market leases	$	(3,088)	$	1,819	$	(1,269)

	Lease		Accumulated		Lease
As of December 31, 2018	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	21,480	$	(12,422)	$	9,058
Above-market leases		3,211		(1,293)		1,918
	$	24,691	$	(13,715)	$	10,976
Lease Intangible Liabilities
Below-market leases	$	(3,089)	$	1,621	$	(1,468)

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

	Intangible		Intangible
Years ending December 31,	Assets		Liabilities
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	434	$	62
2020		1,456		213
2021		1,163		184
2022		1,028		164
2023		891		151
Thereafter		4,595		495
	$	9,567	$	1,269

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 2019 was 6.7 years.

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FAIR VALUE MEASUREMENT

9 Months Ended

Sep. 30, 2019

FAIR VALUE MEASUREMENT

FAIR VALUE MEASUREMENT

NOTE 8 - FAIR VALUE MEASUREMENT

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

	September 30, 2019				December 31, 2018
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable, net	$	390,092	$	408,491	$	406,017	$	400,192
Fair value of interest rate swaps	$	16	$	16	$	30	$	30

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

ASC 820-10 established a three-level valuation hierarchy for fair value measurement.  Management uses these valuation techniques to establish the fair value of the assets at the measurement date.  These valuation techniques are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions. 

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

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

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

· Level 3 – Instruments whose significant inputs are unobservable.

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

Recurring Fair Value Measurements

The following table presents the 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
	(in thousands)
September 30, 2019
Fair value of interest rate swaps	$	—	$	16	$	—	$	16
December 31, 2018
Fair value of interest rate swaps	$	—	$	30	$	—	$	30

Fair value of interest rate swaps:  The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2019 and December 31, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 7.

Fair Value Disclosures

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

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2019
Mortgage notes payable, net	$	—	$	—	$	408,491	$	408,491
December 31, 2018
Mortgage notes payable, net	$	—	$	—	$	400,192	$	400,192

Mortgage notes payable:  The Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders. Judgment is used in determining the appropriate rate for each of the Company’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 3.60% to 3.60% and from 4.82% to 4.83% at September 30, 2019 and December 31, 2018, respectively. The fair value of the Company’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of September 30, 2019 and December 31, 2018. The Company’s mortgage notes payable are further described in Note 6.

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Principal Activity and Significant Accounting Policies - Held for Sale and Unconsolidated Affiliates (Details)	1 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($) ft² item property	Sep. 30, 2019 USD ($) ft² item property	Sep. 30, 2018 USD ($)	Jun. 30, 2019 ft²	Dec. 31, 2018 USD ($) property
Significant Accounting Policies
Number of real estate properties classified as held for sale | property	0	0			0
Impairment losses related to the unconsolidated affiliates		$ 0	$ 0
Total assets held by unconsolidated affiliates	$ 24,710,000	24,710,000			$ 22,954,000
Mortgage notes held by unconsolidated affiliates	16,793,000	16,793,000			17,091,000
Assets	$ 698,018,000	$ 698,018,000			714,467,000
Area of commercial property | ft²				36,000
Operating Partnership | Grand Forks Marketplace Retail Center
Significant Accounting Policies
Investment in unconsolidated affiliates	50.00%	50.00%
Percentage of interest	100.00%	100.00%
Area of commercial property | ft²	183,000	183,000
Operating Partnership | Tenant in common - Office building, Fargo, North Dakota
Significant Accounting Policies
Investment in unconsolidated affiliates	66.67%	66.67%
Area of commercial property | ft²	75,000	75,000
Operating Partnership | SE Savage
Significant Accounting Policies
Number of units | property	190	190
Investment in unconsolidated affiliates	60.00%	60.00%
Cash contribution	$ 1,323,000
SE Savage
Significant Accounting Policies
Assets	2,205,000	$ 2,205,000
Mortgages | Grand Forks Marketplace Retail Center
Significant Accounting Policies
Mortgage carrying amount	10,320,000	10,320,000			10,483,000
Mortgages | Tenant in common - Office building, Fargo, North Dakota
Significant Accounting Policies
Mortgage carrying amount	6,473,000	6,473,000			$ 6,608,000
Mortgages | SE Savage
Significant Accounting Policies
Mortgage carrying amount	$ 0	$ 0
Glen Pond Development
Significant Accounting Policies
Number of units | item	114	114
Development project budget	$ 15,598	$ 15,598
Goldmark Office Park 1715 Building
Significant Accounting Policies
Development project budget	$ 2,000	$ 2,000

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ACQUISITIONS (Tables)

9 Months Ended

Sep. 30, 2019

Schedule of acquisition date fair values, before prorations recorded in conjunction with acquisitions

	Nine Months Ended
	September 30,
		2019		2018
Land, building, tenant improvements and FF&E	$	-	$	8,326
Other liabilities		-		(71)
Net assets acquired		-		8,255
Equity/limited partnership unit consideration		-		(2,176)
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange	-		(3,004)
Net cash consideration	$	-	$	3,075

Real Estate Property Acquisitions 2018

Schedule of acquisitions

Date	Property Name	Location	Property Type	Units/ Square Footage/ Acres		Acquisition Price
3/1/18	Thunder Creek Apartments	Fargo, ND	Apartment complex	57 units	$	4,460	(a)
9/1/18	Chandler 1834	Grand Forks, ND	Apartment complex	12 units		630
9/17/18	Dairy Queen (b)	Apple Valley, MN	Retail building	5,348 sq. ft.		3,000
					$	8,090	(b)

(a) The property was acquired utilizing Internal Revenue Code 1031 tax-deferred exchange funds..

(b) Acquisition price does not include capitalized costs and adjustments of $236.

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ACQUISITIONS

9 Months Ended

Sep. 30, 2019

ACQUISITIONS.

ACQUISITIONS

NOTE 16 – ACQUISITIONS

The Company had no acquisitions during the nine months ended September 30, 2019. The Company closed on the following acquisitions during the nine months ended September 30, 2018:  

Date	Property Name	Location	Property Type	Units/ Square Footage/ Acres		Acquisition Price
3/1/18	Thunder Creek Apartments	Fargo, ND	Apartment complex	57 units	$	4,460	(a)
9/1/18	Chandler 1834	Grand Forks, ND	Apartment complex	12 units		630
9/17/18	Dairy Queen (b)	Apple Valley, MN	Retail building	5,348 sq. ft.		3,000
					$	8,090	(b)

(a) The property was acquired utilizing Internal Revenue Code 1031 tax-deferred exchange funds..

(b) Acquisition price does not include capitalized costs and adjustments of $236.

Total consideration given for acquisitions through September 30, 2018 was completed through issuing approximately 118,000 limited partnership units of the operating partnership valued at $18.50 per unit for an aggregate consideration of approximately $2,176, 1031 tax-deferred exchange funds of $3,004, assumed liabilities of $71 and cash of  $3,075. 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 prorations, the Company recorded in conjunction with the acquisitions discussed above:

	Nine Months Ended
	September 30,
		2019		2018
Land, building, tenant improvements and FF&E	$	-	$	8,326
Other liabilities		-		(71)
Net assets acquired		-		8,255
Equity/limited partnership unit consideration		-		(2,176)
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange	-		(3,004)
Net cash consideration	$	-	$	3,075

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in the first nine months of 2019 and 2018.  In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in the first nine months of 2019 and 2018.  In determining this value, the Board relied upon their experience with, and knowledge about, the Trust’s real estate portfolio and debt obligations.  The Board typically determines the share price on an annual basis. The trustees determine the price in their discretion and use data points to guide their determination which is typically based on a consensus of opinion. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information.

The Board determined the fair value of the shares and limited partnership units to be $18.50 per share/unit effective January 1, 2018. The Board determined the fair value of the shares and limited partnership units to be $19.00 per share/unit effective January 1, 2019.  

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

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

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

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SEGMENT REPORTING (Tables)

9 Months Ended

Sep. 30, 2019

SEGMENT REPORTING

Summary of Segment Revenues and Net Operating Income

	Three months ended  September 30, 2019						Three months ended  September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	23,662	$	6,511	$	30,173	$	22,439	$	6,616	$	29,055
Expenses from rental operations		13,570		1,810		15,380		12,247		1,953		14,200
Net operating income	$	10,092	$	4,701	$	14,793	$	10,192	$	4,663	$	14,855
Depreciation and amortization						5,322						5,274
Interest						4,521						4,557
Administration of REIT						969						1,460
Other (income)/expense						511						(3,520)
Net income					$	3,470					$	7,084

	Nine months ended September 30, 2019						Nine months ended September 30, 2018
	Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)
Income from rental operations	$	70,920	$	19,355	$	90,275	$	66,683	$	20,119	$	86,802
Expenses from rental operations		39,954		5,485		45,439		37,093		5,562		42,655
Net operating income	$	30,966	$	13,870	$	44,836	$	29,590	$	14,557	$	44,147
Depreciation and amortization						16,213						15,907
Interest						13,819						13,632
Administration of REIT						3,051						3,703
Other (income)/expense						(328)						(6,416)
Net income					$	12,081					$	17,321

Summary of Segment Assets and Accumulated Depreciation

As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	601,574	$	194,903	$	796,477
Accumulated depreciation		(100,837)		(40,893)		(141,730)
	$	500,737	$	154,010		654,747
Cash and cash equivalents						13,685
Restricted deposits and funded reserves						8,415
Investment in unconsolidated affiliates						4,046
Other assets						7,558
Intangible assets, less accumulated amortization						9,567
Total Assets					$	698,018

As of December 31, 2018	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	595,006	$	195,690	$	790,696
Accumulated depreciation		(90,143)		(37,969)		(128,112)
	$	504,863	$	157,721		662,584
Cash and cash equivalents						21,212
Restricted deposits and funded reserves						8,853
Investment in unconsolidated affiliates						2,691
Other assets						8,151
Intangible assets, less accumulated amortization						10,976
Total Assets					$	714,467

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Mortgage Notes Payable - Summary (Details) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($) item loan
MORTGAGE NOTES PAYABLE
Long-term debt, gross	$ 392,009
Residential Property | Mortgage Notes Payable
MORTGAGE NOTES PAYABLE
Number of mortgage loans out of compliance | loan		9
Outstanding balance of loans out of compliance, in aggregate		$ 13,128
Fixed rate mortgage notes payable | Mortgage Notes Payable
MORTGAGE NOTES PAYABLE
Long-term debt, gross	392,009	408,339
Less unamortized debt issuance costs	1,917	2,322
Long-term debt, net	390,092	406,017
Debt swapped from variable to fixed rate	$ 827	$ 865
Number of mortgage loans | item	122	127
Fixed rate mortgage notes payable | Mortgage Notes Payable | Minimum
MORTGAGE NOTES PAYABLE
Effective interest rate (as a percent)	3.54%	3.44%
Fixed rate mortgage notes payable | Mortgage Notes Payable | Maximum
MORTGAGE NOTES PAYABLE
Effective interest rate (as a percent)	7.25%	7.25%
Fixed rate mortgage notes payable | Mortgage Notes Payable | Weighted Average
MORTGAGE NOTES PAYABLE
Effective interest rate (as a percent)	4.40%	4.42%

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Segment Reporting - Summary of Segment Assets and Accumulated Depreciation (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018	Sep. 30, 2018
SEGMENT REPORTING
Real estate investments	$ 796,477	$ 790,696
Accumulated depreciation	(141,730)	(128,112)
Real estate investments, net	654,747	662,584
Cash and cash equivalents	13,685	21,212	$ 16,297
Restricted deposits and funded reserves	8,415	8,853	$ 14,811
Investment in unconsolidated affiliates	4,046	2,691
Other assets	7,558	8,151
Intangible assets, less accumulated amortization	9,567	10,976
Total Assets	698,018	714,467
Residential
SEGMENT REPORTING
Real estate investments	601,574	595,006
Accumulated depreciation	(100,837)	(90,143)
Real estate investments, net	500,737	504,863
Commercial
SEGMENT REPORTING
Real estate investments	194,903	195,690
Accumulated depreciation	(40,893)	(37,969)
Real estate investments, net	$ 154,010	$ 157,721

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Acquisitions - Summary of Acquisition Date Fair Values (Details) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2018	Jan. 01, 2019	Jan. 01, 2018
Acquisition date fair values
Net cash consideration	$ 3,075
Price per limited partnership unit issued for acquisition		$ 19.00	$ 18.50
Nonrecurring | Real Estate Property Acquisitions 2018
Acquisition date fair values
Land, building, tenant improvements and FF&E	8,326
Other liabilities	(71)
Net assets acquired	8,255
Equity/limited partnership unit consideration	(2,176)
Restricted cash proceeds related to IRC Section 1031 tax-deferred exchange	(3,004)
Net cash consideration	$ 3,075

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
CONSOLIDATED BALANCE SHEETS
Lease intangible assets, accumulated amortization	$ 15,124	$ 13,715
Lease intangible liabilities, accumulated amortization	$ 1,819	$ 1,621

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CONSOLIDATED STATEMENTS OF CASH FLOWS - Supplemental Disclosures - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD
Cash and cash equivalents	$ 13,685	$ 16,297
Restricted deposits	8,415	14,811
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS, END OF PERIOD	22,100	31,108
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	13,884	13,648
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	4,591	4,256
Dividends declared and not paid	2,435	2,248
UPREIT distributions declared and not paid	4,655	4,470
UPREIT units converted to REIT common shares	28
Shares issued pursuant to trustee compensation plan	62	57
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		2,176
Increase in land improvements due to increase in special assessments payable	213	399
Unrealized gain on interest rate swaps	14	32
Acquisition of assets through assumption of debt and liabilities		71
Capitalized interest and real estate taxes related to construction in progress	$ 55	108
Acquisition of assets with accounts payable		$ 215

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Fair Value Measurement - Fair Value of Company's Financial Assets and Liabilities (Details) - Fair Value - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value Measurements
Mortgage notes payable, net	$ 408,491	$ 400,192
Level 3
Fair Value Measurements
Mortgage notes payable, net	$ 408,491	$ 400,192

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Beneficial Interest - Additional Information (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Beneficial Interest
Common shares, outstanding	9,320,000						9,320,000		8,967,000
Preferred shares, outstanding	0						0		0
Dividends paid							$ 0.78375	$ 0.763125
Dividends declared	$ 7,090	$ 7,064	$ 7,035	$ 6,718	$ 6,682	$ 6,663
Total Beneficial Interest
Beneficial Interest
Common shares, authorized	100,000,000						100,000,000
Common shares, par value	$ 0.01						$ 0.01
Preferred shares, authorized	50,000,000						50,000,000
Preferred shares, par value	$ 0.01						$ 0.01
Dividends declared	$ 2,435	$ 2,407	$ 2,374	$ 2,248	$ 2,217	$ 2,190

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Dispositions - Assets and Liabilities Classified as Held for Sale (Details) $ in Thousands	1 Months Ended		9 Months Ended
	Jul. 31, 2018 USD ($) property	Apr. 30, 2018 USD ($)	Sep. 30, 2019 item	Sep. 30, 2018 USD ($) item
Dispositions
Gain on sale of real estate				$ 4,298
Disposed of by Sale
Dispositions
Number of dispositions | item			0	3
Industrial Property, Redwood Falls, MN | Disposed of by Sale
Dispositions
Property sold		$ 5,200
Gain on sale of real estate		$ 935
Retail Property, Austin, TX | Disposed of by Sale
Dispositions
Property sold	$ 3,615
Gain on sale of real estate	$ 1,266
Office Property, Bismarck, ND | Disposed of by Sale
Dispositions
Number of buildings sold included in office property | property	1
Property sold	$ 4,250
Gain on sale of real estate	$ 1,514

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Principal Activity and Significant Accounting Policies - Revenue recognition (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Revenue Recognition
Increase in revenue due to straight - line adjustment	$ 39	$ 17	$ 17	$ 87
Straight - line receivable	3,391		3,391		$ 3,374
Lease income:
Lease income related to fixed lease payments	28,033		83,613
Lease income related to variable lease payments	1,531		4,570
Other	(328)		(651)
Lease income	29,236		87,532
Rental income accounted for under revenue recognition standard:
Other rental income	937		2,743
Future minimum rental income:
2019 (October 1, 2019 to December 31, 2019)	4,652		4,652
2020	17,578		17,578
2021	14,333		14,333
2022	10,958		10,958
2023	9,205		9,205
Thereafter	51,699		51,699
Total	$ 108,425		$ 108,425
Residential
Revenue Recognition
Percentage of revenue from leases that are generally for terms of one year or less	83.00%		83.00%
Lease income:
Lease income related to fixed lease payments	$ 23,064		$ 68,938
Other	(301)		(706)
Lease income	$ 22,763		$ 68,232
Commercial
Revenue Recognition
Percentage of revenue from leases primarily under long-term lease agreements	17.00%		17.00%
Lease income:
Lease income related to fixed lease payments	$ 4,969		$ 14,675
Lease income related to variable lease payments	1,531		4,570
Other	(27)		55
Lease income	$ 6,473		$ 19,300

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Principal Activity and Significant Accounting Policies - Principal Business Activity (Details) $ in Thousands	Sep. 30, 2019 USD ($) ft² item property	Jun. 30, 2019 ft²	Dec. 31, 2018 USD ($)
Properties
Real estate investments | $	$ 654,747		$ 662,584
No. of properties	173
Area of commercial property | ft²		36,000
Residential Property
Properties
Percentage of residential property out of the trust properties	73.30%
No. of properties	125
Units | item	9,852
Residential Property | North Dakota
Properties
No. of properties	105
Units | item	6,160
Residential Property | Minnesota
Properties
No. of properties	16
Units | item	3,033
Residential Property | Missouri
Properties
No. of properties	1
Units | item	164
Residential Property | Nebraska
Properties
No. of properties	3
Units | item	495
Commercial Property
Properties
Percentage of commercial property out of the trust properties	26.70%
No. of properties	48
Area of commercial property | ft²	1,662,000
Commercial Property | North Dakota
Properties
No. of properties	20
Area of commercial property | ft²	780,000
Commercial Property | Minnesota
Properties
No. of properties	15
Area of commercial property | ft²	680,000
Commercial Property | Nebraska
Properties
No. of properties	1
Area of commercial property | ft²	19,000
Commercial Property | Arkansas
Properties
No. of properties	2
Area of commercial property | ft²	28,000
Commercial Property | Colorado
Properties
No. of properties	1
Area of commercial property | ft²	17,000
Commercial Property | Iowa
Properties
No. of properties	1
Area of commercial property | ft²	33,000
Commercial Property | Louisiana
Properties
No. of properties	1
Area of commercial property | ft²	15,000
Commercial Property | Michigan
Properties
No. of properties	1
Area of commercial property | ft²	12,000
Commercial Property | Mississippi
Properties
No. of properties	1
Area of commercial property | ft²	15,000
Commercial Property | Wisconsin
Properties
No. of properties	5
Area of commercial property | ft²	63,000

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FAIR VALUE MEASUREMENT (Tables)

9 Months Ended

Sep. 30, 2019

FAIR VALUE MEASUREMENT

Carrying Value and Estimated Fair Value of Company's Financial Instruments

	September 30, 2019				December 31, 2018
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable, net	$	390,092	$	408,491	$	406,017	$	400,192
Fair value of interest rate swaps	$	16	$	16	$	30	$	30

Schedule of Fair Value of Liabilities on Recurring Basis

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2019
Fair value of interest rate swaps	$	—	$	16	$	—	$	16
December 31, 2018
Fair value of interest rate swaps	$	—	$	30	$	—	$	30

Fair Value of Company's Financial Assets and Liabilities

	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2019
Mortgage notes payable, net	$	—	$	—	$	408,491	$	408,491
December 31, 2018
Mortgage notes payable, net	$	—	$	—	$	400,192	$	400,192

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MORTGAGE NOTES PAYABLE

9 Months Ended

Sep. 30, 2019

MORTGAGE NOTES PAYABLE

MORTGAGE NOTES PAYABLE

NOTE 6 - MORTGAGE NOTES PAYABLE

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

	Principal Balance At
	September 30,		December 31,
	2019		2018
	(in thousands)
Fixed rate mortgage notes payable (a)	$	392,009	$	408,339
Less unamortized debt issuance costs		1,917		2,322
	$	390,092	$	406,017

(a) Includes $827 and $865 of variable rate mortgage debt that was swapped to a fixed rate at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, we had 122 mortgage loans with effective interest rates ranging from 3.54% to 7.25% per annum and a weighted average effective interest rate of 4.40% per annum.

As of December 31, 2018, we had 127 mortgage loans with effective interest rates ranging from 3.44% to 7.25% per annum, and a weighted average effective interest rate of 4.42% per annum.

The majority of the Company’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs.  Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits.

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.  As of December 31, 2018,  nine loans on residential properties were out of compliance with annual loan covenants due to various unit renovation and parking lot repair and maintenance costs and increased vacancies in the North Dakota markets.  The loans were secured by properties located in Bismarck, Fargo and Grand Forks, North Dakota with a total outstanding balance of $13,128 at December 31, 2018. Annual waivers have been received from the lenders. 

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)
2019 (October 1, 2019 to December 31, 2019)	$	9,281
2020		28,011
2021		46,541
2022		31,788
2023		48,046
Thereafter		228,342
Total payments	$	392,009

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REDEMPTION PLANS

9 Months Ended

Sep. 30, 2019

REDEMPTION PLANS

REDEMPTION PLANS

NOTE 10 – REDEMPTION PLANS

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans. Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $35,000 worth of securities. Currently, the fixed redemption price is $18.00 per share or unit under the plans, which price became effective January 1, 2019.

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

During the nine months ended September 30, 2019 and 2018, the Company redeemed 33,000 and 63,000 common shares valued at $593 and $1,099.  In addition, during the nine months ended September 30, 2019 and 2018, the Company redeemed 55,000 and 61,000 units valued at $980 and $1,068.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2019

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

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

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

Litigation

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

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PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2019

PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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, 2018, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2019 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and nine months ended September 30, 2019 and 2018, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial statements as of and for the three and nine months ended September 30, 2019. These adjustments are of a normal recurring nature.

Principles of Consolidation

Principles of Consolidation

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

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.

Principal Business Activity

Principal Business Activity

Sterling currently owns directly and indirectly 173 properties.  The Trust’s 125 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings.  The Trust owns 48 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties.  Presently, the Trust’s mix of properties is 73.3% residential and 26.7% commercial (based on cost) and total $654,747 in real estate investments at September 30, 2019. Sterling’s current acquisition strategy and focus is on multifamily apartment properties.  We currently have no plans to actively market our existing commercial properties for sale.  We will consider unsolicited offers for purchase of non-multifamily properties on a case by case basis. Prior to June 30, 2019, Sterling did not account for mezzanine and storage space square footage on their commercial properties. As of June 30, 2019 the addition to this space led to an additional 36,000 square feet of commercial property.

Residential Property	Location	No. of Properties	Units
	North Dakota	105	6,160
	Minnesota	16	3,033
	Missouri	1	164
	Nebraska	3	495
		125	9,852
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	15	680,000
	Mississippi	1	15,000
	Nebraska	1	19,000
	Wisconsin	5	63,000
		48	1,662,000

Concentration of Credit Risk

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

Use of Estimates

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

Real Estate Investments

Real Estate Investments

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

The Company allocates the purchase price of each acquired investment property accounted for as an asset acquisition based upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market, and (vi) goodwill, if any. Transaction costs related to acquisitions accounted for as asset acquisitions are expensed as incurred and included within “Administration of REIT expenses” in the accompanying consolidated statements of operations and other comprehensive income.

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

The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over the life of the related lease as amortization expense. The Company incurred amortization expense pertaining to acquired in-place lease value intangibles of $401 and $473for the three months ended September 30, 2019 and 2018, respectively and $1,249 and $1,516 for the nine months ended September 30, 2019 and 2018, respectively.

The portion of the purchase price allocated to acquired above and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to real estate rental income. Amortization pertaining to above market lease intangibles of $54 and $55 for the three months ended September 30, 2019 and 2018, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $65 and $68 for the three months ended September 30, 2019 and 2018, respectively, was recorded as an increase to real estate rental income.  Amortization pertaining to above market lease intangibles of $160 and $166 for the nine months ended September 30, 2019 and 2018, respectively, was recorded as a reduction to real estate rental income. Amortization pertaining to below market lease intangibles of $198 and $208 for the nine months ended September 30, 2019 and 2018, respectively, was recorded as an increase to real estate rental income.

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

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

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

Depreciation expense for the three months ended September 30, 2019 and 2018 totaled $4,879 and $4,761, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 totaled $14,785 and $14,267, respectively.

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

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

· a substantial decline or continued low occupancy rate;

· continued difficulty in leasing space;

· significant financially troubled tenants;

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

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

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

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

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

· projected capital expenditures and lease origination costs;

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

· comparable selling prices; and

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

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties.  There were no impairment losses during the nine months ended September 30, 2019 and 2018.    

Properties Held for Sale

Properties Held for Sale

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

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

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

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

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

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

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

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

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

There were no properties classified as held for sale at September 30, 2019 or at December 31, 2018.

Construction in Progress

Construction in Progress

The Company 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, 2019 consists primarily of development and planning costs associated with the Glen Pond development in Eagan, Minnesota and the Goldmark Office Park 1715 building located in Fargo, North Dakota. The Glen Pond development consists of 114 units of multifamily property. Current expectations are that the project will be completed in the second or third quarter of calendar year 2020 and the current project budget approximates $15,598. The Goldmark Office Park 1715 building is a commercial office building. Current expectations are that the project will be completed in the fourth quarter of calendar year 2019 and the current project budget is approximately $2,000.

Cash and Cash Equivalents

Cash, Cash Equivalents and Restricted Deposits

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

Investment in Unconsolidated Affiliates

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under FASB ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings, contributions and distributions. We evaluate the carrying amount of the investments for impairment in accordance with FASB ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the nine months ended September 30, 2019 and 2018.  

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

In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns.  As of September 30, 2019, our tenant in common arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. As of September 30, 2019, our investment in the joint venture does not qualify as a variable interest entity, does not meet the control requirements for consolidation or significant influence requirements, as defined in ASC 810, and does meet the definition of a joint venture.

As of September 30, 2019 and December 31, 2018, the unconsolidated affiliates held total assets of $24,710 and $22,954 and mortgage notes payable of $16,793 and $17,091, respectively.

The operating partnership is a 50% owner of a retail center as a tenant in common through 100% ownership in a limited liability company.  The retail center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at September 30, 2019 and December 31, 2018 of $10,320 and $10,483, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2019 and December 31, 2018 of $6,473 and $6,608, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 60% interest in a joint venture (“SE Savage”) that intends to develop a 190 unit multifamily property. The operating partnership has contributed $1,323 in cash to SE Savage during September 2019. SE Savage holds land located in Savage, Minnesota, total assets of $2,205, and no mortgage payable.  

Receivables

Receivables

Receivables consist primarily of amounts due for rent and tenant charges. Accounts receivable are carried at original amounts billed. The operating partnership reviews collectability of charges under its tenant operating leases on a quarterly basis. In the event that collectability is deemed not probable for any tenant charges, beginning with the adoption of ASC 842 as of January 1, 2019, the operating partnership recognizes an adjustment to rental income. Prior to the adoption of ASC 842, The Company recognized a provision for uncollectible amounts or a direct write-off of the specific rent receivable.

Notes receivable are issued periodically and are secured and interest bearing. Receivables are included in “Other assets” in the accompanying consolidated balance sheets.

Financing and Lease Costs

Financing and Lease Costs

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

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

Debt Issuance Costs

Debt Issuance Costs

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

Lease Intangible Assets

Lease Intangible Assets

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

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no impairment charges were necessary at September 30, 2019 and December 31, 2018.

Noncontrolling Interest

Noncontrolling Interest

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

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

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

Syndication Costs

Syndication Costs

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

Federal Income Taxes

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 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.

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP.  The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We follow FASB ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 2019 and December 31, 2018 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 2015.

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

Revenue Recognition

Revenue Recognition

We are the lessor for our residential and commercial leases and these leases will continue to be accounted for as operating leases under the new standard as described under Recent Accounting Pronouncements.  Therefore, the Company did not have significant changes in accounting for lease revenues.

As of September 30, 2019, we derived 83% of our revenues from residential leases that are generally for terms of one year or less. The residential leases may include lease income related to such items as parking, storage and non-refundable deposits that we treat as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same.  The collection of lease payments at lease commencement is probable and therefore we subsequently recognize lease income over the lease term on a straight-line basis.  Residential leases are renewable upon consent of both parties on an annual or monthly basis.

As of September 30, 2019, we derived 17% of our revenues from commercial leases primarily under long-term lease agreements. We elected to apply the package of practical expedients for the commercial leases and these leases will continue to be accounted for as operating leases as of January 1, 2019.  Substantially all commercial leases contain fixed escalations or, in some instances, changes based on the Consumer Price Index, which occur at specified times during the term of the lease. In certain commercial leases, variable lease income, such as percentage rent, is recognized when rents are earned. We recognize rental income and rental abatements from our commercial leases when earned on a straight-line basis over the lease term. Recognition of rental income commences when control of the leased space has been transferred to the tenant.

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

We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment decreased revenue by $39 and increased revenue by $17 for the three months ended September 30, 2019 and 2018, respectively. The straight-line rent adjustment increased revenue by $17 and $87 the nine months ended September 30, 2019 and 2018, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, 2019 and December 31, 2018 was $3,391 and $3,374, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

Upon adoption of ASU 2016-02 on January 1, 2019, we elected not to bifurcate lease contracts into lease and non-lease components, since the timing and pattern of revenue is not materially different and the non-lease component is not the primary component of the lease. Accordingly, both lease and non-lease components are presented in “Real estate rental income” beginning January 1, 2019 in our consolidated financial statements. The adoption of ASU 2016-02 did not result in a material change to our recognition of real estate rental income.

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

	Nine months ended September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	68,938	$	14,675	$	83,613
Lease income related to variable lease payments		—		4,570		4,570
Other (a)		(706)		55		(651)
Lease Income (b)	$	68,232	$	19,300	$	87,532

(a) For the nine months ended September 30, 2019, “Other” is comprised of revenue adjustments related to changes in collectibility and amortization of above and below market lease intangibles and lease inducements.

(b) Excludes other rental income for the nine months ended September 30, 2019 of $2,743, which is accounted for under the revenue recognition standard.

	Three months ended  September 30, 2019
As of September 30, 2019	Residential		Commercial		Total
	(in thousands)
Lease income related to fixed lease payments	$	23,064	$	4,969	$	28,033
Lease income related to variable lease payments		—		1,531		1,531
Other (a)		(301)		(27)		(328)
Lease Income (b)	$	22,763	$	6,473	$	29,236

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

(b) Excludes other rental income for the three months ended September 30, 2019 of $937, which is accounted for under the revenue recognition standard.

As of September 30, 2019, non-cancelable commercial operating leases provide for future minimum rental income as follows (in thousands). Apartment leases are not included as the terms are generally for one year or less.

Years ending December 31,	Amount
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	4,652
2020		17,578
2021		14,333
2022		10,958
2023		9,205
Thereafter		51,699
	$	108,425

Earnings per Common Share

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 as of September 30, 2019 and 2018, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the three months ended September 30, 2019 and 2018, Sterling’s denominators for both basic and diluted earnings per common share were approximately 9,322,000 and 8,840,000, respectively. For the nine months ended September 30, 2019 and 2018, Sterling’s denominators for the basic and diluted earnings per common share were approximately 9,208,000 and 8,730,000, respectively.

Reclassifications

Reclassifications

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

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

The new standard was effective for the Company effective January 1, 2019. The new standard was adopted using the optional transition method to apply the standard as of the effective date. The Company elected to apply the package of practical expedients for the leases as lessor for its residential and commercial leases and these leases will continue to be accounted for as operating leases as of the effective date. Further, the Company elected the practical expedient to combine lease and nonlease components for leases as lessor. Finally, the Company evaluated taxes collected from lessees, lessor costs paid directly by lessees, and initial direct costs and determined that the guidance was consistent with existing practice. Based on these evaluations, the Company determined that for leases as lessor, as of January 1, 2019, there was no impact on lease revenue or related expenses.

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

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MORTGAGE NOTES PAYABLE (Tables)

9 Months Ended

Sep. 30, 2019

MORTGAGE NOTES PAYABLE

Schedule of Mortgage Notes Payable

	Principal Balance At
	September 30,		December 31,
	2019		2018
	(in thousands)
Fixed rate mortgage notes payable (a)	$	392,009	$	408,339
Less unamortized debt issuance costs		1,917		2,322
	$	390,092	$	406,017

(a) Includes $827 and $865 of variable rate mortgage debt that was swapped to a fixed rate at September 30, 2019 and December 31, 2018, respectively.

Scheduled Maturities of Mortgage Notes Payable

Years ending December 31,	Amount
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	9,281
2020		28,011
2021		46,541
2022		31,788
2023		48,046
Thereafter		228,342
Total payments	$	392,009

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Hedging Activities - Additional Information (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Hedging Activities
Liability and other comprehensive loss	$ 16	$ 30
Interest Rate Swap, April 2020
Hedging Activities
Interest rate swaps value	$ 1,294
Interest rate swaps percentage	7.25%
Derivative maturity dates	Apr. 01, 2020

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Lease Intangibles - Schedule of Estimated Aggregate Amortization Expense (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Intangible Assets
2019 (October 1, 2019 to December 31, 2019)	$ 434
2020	1,456
2021	1,163
2022	1,028
2023	891
Thereafter	4,595
Total	9,567	$ 10,976
Intangible Liabilities
2019 (October 1, 2019 to December 31, 2019)	62
2020	213
2021	184
2022	164
2023	151
Thereafter	495
Total	$ 1,269	$ 1,468
Amortization period	6 years 8 months 12 days

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Segment Reporting - Additional Information (Details)	9 Months Ended
	Sep. 30, 2019 segment
SEGMENT REPORTING
Number of reportable segments	2

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LEASE INTANGIBLES (Tables)

9 Months Ended

Sep. 30, 2019

LEASE INTANGIBLES

Schedule of Intangible Assets, Liabilities and Accumulated Amortization

	Lease		Accumulated		Lease
As of September 30, 2019	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	21,480	$	(13,671)	$	7,809
Above-market leases		3,211		(1,453)		1,758
	$	24,691	$	(15,124)	$	9,567
Lease Intangible Liabilities
Below-market leases	$	(3,088)	$	1,819	$	(1,269)

	Lease		Accumulated		Lease
As of December 31, 2018	Intangibles		Amortization		Intangibles, net
Lease Intangible Assets	(in thousands)
In-place leases	$	21,480	$	(12,422)	$	9,058
Above-market leases		3,211		(1,293)		1,918
	$	24,691	$	(13,715)	$	10,976
Lease Intangible Liabilities
Below-market leases	$	(3,089)	$	1,621	$	(1,468)

Schedule of Estimated Aggregate Amortization Expense

	Intangible		Intangible
Years ending December 31,	Assets		Liabilities
	(in thousands)
2019 (October 1, 2019 to December 31, 2019)	$	434	$	62
2020		1,456		213
2021		1,163		184
2022		1,028		164
2023		891		151
Thereafter		4,595		495
	$	9,567	$	1,269

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RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2019

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 13 – RELATED PARTY TRANSACTIONS

Property Management Fees

During the nine months ended September 30, 2019 and 2018, we paid property management fees to GOLDMARK Property Management in an amount equal to 5% of rents of the properties managed by GOLDMARK. GOLDMARK Property Management is owned in part by Kenneth Regan, James Wieland and Joel Thomsen. For the nine months ended September 30, 2019 and 2018, we paid management fees of $9,530 and $8,934, respectively, to GOLDMARK Property Management.  In addition, during the nine months ended September 30, 2019 and 2018, we paid repair and maintenance related payroll and payroll related expenses to GOLDMARK Property Management totaling $4,664 and $3,921, respectively.

Board of Trustee Fees

We incurred Trustee fees of  $44 and  $53 during the nine months ended September 30, 2019 and 2018, respectively.  As of September 30, 2019, and December 31, 2018 we owed our Trustees $15 and $34 for unpaid board of trustee fees, respectively.  There is no cash retainer paid to Trustees.  Instead, we pay Trustees specific amounts for meetings attended. 

The plan provides:

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

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

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The following is a brief description of the current fees and compensation that may be 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 28, 2019, effective until March 31, 2020.  The Board of Trustees approved amendment number one to the eighth amended and restated Advisory Agreement on September 19, 2019.

Management Fee:  0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

During the nine months ended September 30, 2019 and 2018, we incurred advisory management fees of $2,244 and $2,167 with Sterling Management, LLC, our Advisor. As of September 30, 2019 and December 31, 2018, we owed our Advisor $250 and $242, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations.  During the nine months ended September 30, 2019 and 2018, we reimbursed the Advisor for operating costs totaling $22 and $23, respectively.  There were no unpaid reimbursable operating costs owed to our Advisor as of September 30, 2019 or December 31, 2018.

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

During the nine months ended September 30, 2019 there were no acquisition fees incurred with our Advisor.  During the nine months ended September 30, 2018 we incurred acquisition fees of $205 with our Advisor.  There were no acquisition fees owed to our Advisor as of September 30, 2019. As of December 31, 2018, we owed our Advisor $32 for unpaid acquisition fees.  

Disposition Fee: For its services in the effort to sell any investment for us, the Advisor receives a disposition fee of 2.5% of the sales price of each property disposition, capped at $375 per disposition.

During the nine months ended September 30, 2019 there were no disposition fees incurred with our Advisor.  During the nine months ended September 30, 2018, we incurred $130 in disposition fees with our Advisor. See Note 15. There were no disposition fees owed to our Advisor as of September 30, 2019 or December 31, 2018.

Financing Fee:  0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility. The finance fee shall be capped at $38 per loan, refinance, line of credit or other credit facility.

During the nine months ended September 30, 2019 there were no financing fees incurred with our Advisor for loan financing and refinancing activities. During the nine months ended September 30, 2018, we incurred financing fees of  $61 with our Advisor. There were no financing fees owed to our Advisor as of September 30, 2019.  As of December 31, 2018, we owed our Advisor $8 for unpaid financing fees. 

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

During the three and nine months ended September 30, 2019, there were $3 in project management fees incurred with our Advisor for capital improvement projects. As of September 30, 2019 we owed our Advisor $3 for unpaid project management fees.

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

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

TC = Total Project Cost

During the nine months ended September 30, 2019 and 2018, there were no development fees incurred with our Advisor. As of both September 30, 2019, and December 31, 2018, we owed our Advisor a total of $104 for unpaid development fees, of which the entire amount was for unpaid development fees as part of a 10% hold back with respect to the Stonefield development project, respectively.

Operating Partnership Units Issued in Connection with Acquisitions

During the nine months ended September 30, 2019, there were no operating partnership units issued directly or indirectly, to affiliated entities.

During the nine months ended September 30, 2018, we issued directly or indirectly 42,000 operating partnership units to entities 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 $773. 

Commissions

During the nine months ended September 30, 2019, there were no commissions incurred with a related party.

During the nine months ended September 30, 2018, we incurred real estate commissions of $21 owed to GOLDMARK Commercial Real Estate Services, Inc. (f/k/a GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc. ) which is controlled by Messrs. Regan and Wieland. There were no outstanding commissions owed as of September 30, 2019 or December 31, 2018.

Rental Income

During the nine months ended September 30, 2019 and 2018, we received rental income of $42 and $37, respectively, under an operating lease agreement with our Advisor.

During the nine months ended September 30, 2019 and 2018, we received rental income of $42 and $41, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.

During the nine months ended September 30, 2019 and 2018, we received rental income of $173 and $172, respectively, under operating lease agreements with GOLDMARK Property Management.

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2019

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 17 - SUBSEQUENT EVENTS

On October 15, 2019, we paid a dividend or distribution of $0.26125 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, 2019.

On October 2, 2019, we entered into an interest rate swap in the notional amount of $7,200 to provide a fixed rate of 3.15% that matures November 1, 2029. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it will be recorded at fair value and changes in fair value are recorded to accumulated comprehensive income.

On November 1, 2019, the operating partnership decided to self-insure 50% of the primary layer of their insurance policy, as a result the operating partnership believes it is reasonably possible that we could be required to pay between $0 and $860.   

On November 8, 2019, the operating partnership purchased land in a 60% owned joint venture (“SE Maple Grove”) that intends to develop a 160 unit multifamily property. SE Maple Grove holds land located in Maple Grove, Minnesota, and has total assets of $3,455, and no mortgage payable.

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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Subsequent Events - Additional Information (Details) $ / shares in Units, $ in Thousands			9 Months Ended
	Nov. 01, 2019 USD ($)	Oct. 15, 2019 $ / shares	Sep. 30, 2019 USD ($) $ / shares	Sep. 30, 2018 $ / shares	Nov. 08, 2019 USD ($) item	Oct. 02, 2019 USD ($)	Dec. 31, 2018 USD ($)
Subsequent Events
Dividend or distribution paid | $ / shares			$ 0.78375	$ 0.763125
Assets			$ 698,018				$ 714,467
Subsequent Event
Subsequent Events
Dividend or distribution paid | $ / shares		$ 0.26125
Self-insure percentage of the primary layer of insurance policy	50.00%
Subsequent Event | Minimum
Subsequent Events
Estimated amount payable as a result of the self-insurance of 50% of the primary layer of the insurance policy	$ 0
Subsequent Event | Maximum
Subsequent Events
Estimated amount payable as a result of the self-insurance of 50% of the primary layer of the insurance policy	$ 860
Subsequent Event | Interest rate swap
Subsequent Events
Hedging Activities Interest Rate Swap Value						$ 7,200
Hedging Activities Interest Rate Swaps Percentage						3.15%
Subsequent Event | Operating Partnership | SE Maple Grove
Subsequent Events
Ownership interest (as a percent)					60.00%
Number of units | item					160
Subsequent Event | SE Maple Grove
Subsequent Events
Assets					$ 3,455
Subsequent Event | SE Maple Grove | Mortgages
Subsequent Events
Mortgage carrying amount					$ 0

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Lines of Credit - Additional Information (Details) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($)	Dec. 31, 2018 property
Lines of Credit
Line of credit outstanding	$ 0
Unused line of credit	32,815
Wells Fargo Bank
Lines of Credit
Agreed line of credit	$ 18,300
Expiration date	Jun. 01, 2021
Wells Fargo Bank | 1-Month LIBOR
Lines of Credit
Variable interest rate of line of credit	2.25%
Bremer Bank
Lines of Credit
Number of properties out of compliance with debt covenant | property		3
Bremer Bank Agreement One
Lines of Credit
Agreed line of credit	$ 6,315
Expiration date	Nov. 01, 2019
Bremer Bank Agreement One | Prime Rate
Lines of Credit
Basis reduction on variable rate (as a percent)	0.50%
Bremer Bank Agreement Two
Lines of Credit
Agreed line of credit	$ 5,000
Expiration date	Jun. 01, 2022
Bremer Bank Agreement Two | Floating LIBOR
Lines of Credit
Variable interest rate of line of credit	2.00%
Bank of the West
Lines of Credit
Agreed line of credit	$ 3,200
Expiration date	Nov. 01, 2020
Bank of the West | LIBOR
Lines of Credit
Variable interest rate of line of credit	2.04%

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Segment Reporting - Summary of Segment Revenues and Net Operating Income (Details) - USD ($) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
SEGMENT REPORTING
Income from rental operations	$ 30,173			$ 29,055			$ 90,275	$ 86,802
Expenses from rental operations	15,380			14,200			45,439	42,655
Net operating income	14,793			14,855			44,836	44,147
Depreciation and amortization	5,322			5,274			16,213	15,907
Interest	4,521			4,557			13,819	13,632
Administration of REIT	969			1,460			3,051	3,703
Other (income)/expense	511			(3,520)			(328)	(6,416)
Net income	3,470	$ 4,821	$ 3,790	7,084	$ 4,979	$ 5,258	12,081	17,321
Residential
SEGMENT REPORTING
Income from rental operations	23,662			22,439			70,920	66,683
Expenses from rental operations	13,570			12,247			39,954	37,093
Net operating income	10,092			10,192			30,966	29,590
Commercial
SEGMENT REPORTING
Income from rental operations	6,511			6,616			19,355	20,119
Expenses from rental operations	1,810			1,953			5,485	5,562
Net operating income	$ 4,701			$ 4,663			$ 13,870	$ 14,557

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Fair Value Measurement - Carrying Value and Estimated Fair Value of Company's Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Carrying Value
Financial liabilities:
Mortgage notes payable, net	$ 390,092	$ 406,017
Fair value of interest rate swaps	16	30
Fair Value
Financial liabilities:
Mortgage notes payable, net	408,491	400,192
Fair value of interest rate swaps	$ 16	$ 30

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
ASSETS
Land and land improvements	$ 114,240	$ 114,027
Building and improvements	675,193	675,308
Construction in progress	7,044	1,361
Real estate investments	796,477	790,696
Less accumulated depreciation	(141,730)	(128,112)
Real estate investments, net	654,747	662,584
Cash and cash equivalents	13,685	21,212
Restricted deposits	8,415	8,853
Investment in unconsolidated affiliates	4,046	2,691
Notes receivable	1,106
Lease intangible assets, less accumulated amortization of $15,124 in 2019 and $13,715 in 2018	9,567	10,976
Other assets, net	6,452	8,151
Total Assets	698,018	714,467
LIABILITIES
Mortgage notes payable, net	390,092	406,017
Dividends payable	7,090	6,828
Tenant security deposits payable	4,436	4,286
Lease intangible liabilities, less accumulated amortization of $1,819 in 2019 and $1,621 in 2018	1,269	1,468
Accrued expenses and other liabilities	14,983	12,117
Total Liabilities	417,870	430,716
COMMITMENTS and CONTINGENCIES - Note 14
SHAREHOLDERS' EQUITY
Beneficial interest	101,314	97,883
Noncontrolling interest in operating partnership	176,413	183,360
Partially owned properties	2,437	2,538
Accumulated other comprehensive loss	(16)	(30)
Total Shareholders' Equity	280,148	283,751
Total liabilities and shareholders' equity	$ 698,018	$ 714,467

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
OPERATING ACTIVITIES
Net income	$ 12,081	$ 17,321
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of real estate investments		(4,298)
Loss/(Gain) on involuntary conversion	487	(1,467)
Equity in income of unconsolidated affiliates	(629)	(445)
Distributions of earnings of unconsolidated affiliates	629	445
Allowance for uncollectible accounts receivable	125	(567)
Depreciation	14,785	14,267
Amortization	1,390	1,590
Amortization of debt issuance costs	465	523
Effects on operating cash flows due to changes in
Other assets	1,908	(1,102)
Tenant security deposits payable	150	(1)
Accrued expenses and other liabilities	2,624	2,085
NET CASH PROVIDED BY OPERATING ACTIVITIES	34,015	28,351
INVESTING ACTIVITIES
Purchase of real estate investment properties		(6,079)
Capital expenditures and tenant improvements	(8,935)	(8,639)
Proceeds from sale of real estate investments and non-real estate investments		13,052
Proceeds from involuntary conversion	1,513	1,111
Investment in unconsolidated affiliates	(1,323)	(81)
Distributions in excess of earnings received from unconsolidated affiliates	(32)	88
Notes receivable issued	(1,106)
NET CASH USED IN INVESTING ACTIVITIES	(9,883)	(548)
FINANCING ACTIVITIES
Payments for financing, debt issuance and lease costs	(27)	(272)
Principal payments on special assessments payable	(245)	(141)
Proceeds from issuance of mortgage notes payable and subordinated debt		10,281
Principal payments on mortgage notes payable	(16,330)	(12,028)
Advances on lines of credit		3,811
Payments on lines of credit		(3,811)
Proceeds from issuance of shares under optional purchase plan	2,411	3,080
Shares/units redeemed	(1,573)	(2,167)
Dividends/distributions paid	(16,333)	(16,001)
NET CASH USED IN FINANCING ACTIVITIES	(32,097)	(17,248)
NET CHANGE IN CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS	(7,965)	10,555
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT BEGINNING OF PERIOD	30,065	20,553
CASH AND CASH EQUIVALENTS AND RESTRICTED DEPOSITS AT END OF PERIOD	$ 22,100	$ 31,108

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Related Party Transactions - Advisory Agreement and Other (Details) $ / item in Thousands, $ in Thousands	3 Months Ended	9 Months Ended		12 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($) employee $ / item shares	Sep. 30, 2018 USD ($) shares	Dec. 31, 2018 USD ($)
Related Party Transactions
Number of paid employees | employee		0
Management fee percentage of total assets		0.35%
Maximum management fee payable in cash or common shares		not to exceed one-twelfth of 0.35% of the total assets
Rental Income	$ 28,033	$ 83,613
Unpaid board of trustee fees	15	$ 15		$ 34
Advisory Agreement
Related Party Transactions
Business acquisition purchase price allocation acquisition fees percentage		2.50%
Advisory disposition fee for sale of investments		2.50%
Advisory disposition fee sale of cap amount | $ / item		375
Financing fee percentage		0.25%
Finance fee capped per loan		$ 38
Percentage Of Project Management Fee		6.00%
Project Management Fee	3	$ 3
Unpaid board of trustee fees	3	$ 3
Advisory Agreement | Minimum
Related Party Transactions
Development fee percentage		3.00%
Advisory Agreement | Maximum
Related Party Transactions
Criteria acquisition fees | $ / item		375
Acquisition fees and expenses net percentage		6.00%
Development fee percentage		5.00%
Advisory Agreement | 0 – 10M
Related Party Transactions
Development fee percentage		5.00%
Formula		0M – 5.0% x (TC – 0M)
Advisory Agreement | 0 – 10M | Minimum
Related Party Transactions
Total Cost		$ 0
Range of Fee		0
Advisory Agreement | 0 – 10M | Maximum
Related Party Transactions
Total Cost		10,000
Range of Fee		$ 500
Advisory Agreement | 10M - 20M
Related Party Transactions
Development fee percentage		4.50%
Formula		.50M – 4.5% x (TC – 10M)
Advisory Agreement | 10M - 20M | Minimum
Related Party Transactions
Total Cost		$ 10,000
Range of Fee		500
Advisory Agreement | 10M - 20M | Maximum
Related Party Transactions
Total Cost		20,000
Range of Fee		$ 950
Advisory Agreement | 20M – 30M
Related Party Transactions
Development fee percentage		4.00%
Formula		.95M – 4.0% x (TC – 20M)
Advisory Agreement | 20M – 30M | Minimum
Related Party Transactions
Total Cost		$ 20,000
Range of Fee		950
Advisory Agreement | 20M – 30M | Maximum
Related Party Transactions
Total Cost		30,000
Range of Fee		$ 1,350
Advisory Agreement | 30M – 40M
Related Party Transactions
Development fee percentage		3.50%
Formula		1.35M – 3.5% x (TC – 30M)
Advisory Agreement | 30M – 40M | Minimum
Related Party Transactions
Total Cost		$ 30,000
Range of Fee		1,350
Advisory Agreement | 30M – 40M | Maximum
Related Party Transactions
Total Cost		40,000
Range of Fee		$ 1,700
Advisory Agreement | 40M – 50M
Related Party Transactions
Development fee percentage		3.00%
Formula		1.70M – 3.0% x (TC – 40M)
Advisory Agreement | 40M – 50M | Minimum
Related Party Transactions
Total Cost		$ 40,000
Range of Fee		1,700
Advisory Agreement | 40M – 50M | Maximum
Related Party Transactions
Total Cost		50,000
Range of Fee		2,000
Sterling Management, LLC
Related Party Transactions
Advisory management fees		2,244	$ 2,167
Advisory management fees outstanding	250	250		242
Advisory management fees for operating costs		22	23
Unpaid reimbursable operating costs owed to Advisor	0	0		0
Acquisition fees			205
Acquisition fees outstanding	0	0		32
Disposition fees			130
Disposition fees outstanding	0	0		0
Financing fees for loan financing and refinancing activities		0	61
Financing fees for loan financing and refinancing outstanding	$ 0	0		8
Development fee		0	0
Development fees hold back outstanding		$ 104		104
Percentage of development fees hold back	10.00%	10.00%
Rental Income		$ 173
Rental Income			172
GOLDMARK Property Management
Related Party Transactions
Rental Income		42
Rental Income			41
GOLDMARK SCHLOSSMAN Commercial Real Estate Services
Related Party Transactions
Real estate commissions		0	21
Real estate commissions outstanding	$ 0	0		$ 0
Rental Income		$ 42
Rental Income			$ 37
Entity Affiliated With Messrs Regan and Wieland
Related Party Transactions
Number of operating partnership (OP) units issued in connection with the acquisition of various properties | shares		0	42,000
Value of operating partnership (OP) units issued in connection with the acquisition of various properties			$ 773

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Fair Value Measurement - Schedule of Fair Value of Assets on Recurring Basis (Details) - Recurring - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value Measurements
Fair value of interest rate swaps	$ 16	$ 30
Level 2
Fair Value Measurements
Fair value of interest rate swaps	$ 16	$ 30

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Redemption Plans - Additional Information (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Redemption plans
Redemption price of securities							$ 18.00
Redemption of shares, value	$ 321	$ 426	$ 826	$ 504	$ 733	$ 930
Redemption Plans
Redemption plans
Amount of securities redemption	$ 35,000						$ 35,000
Redemption of shares							33,000	63,000
Redemption of shares, value							$ 593	$ 1,099
Additional redemption of units							55,000	61,000
Additional redemption of units, value							$ 980	$ 1,068

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Principal Activity and Significant Accounting Policies - Real Estate Investments (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Real Estate Investments
Amortization expense			$ 1,390	$ 1,590
Amortization expense of below market lease	$ 65	$ 68	198	208
Depreciation expense	4,879	4,761	14,785	14,267
Loss on impairment of property			$ 0	0
Building and improvements
Real Estate Investments
Estimated useful life			40 years
Furniture, fixtures and equipment | Minimum
Real Estate Investments
Estimated useful life			5 years
Furniture, fixtures and equipment | Maximum
Real Estate Investments
Estimated useful life			9 years
In-place leases
Real Estate Investments
Amortization expense	401	473	$ 1,249	1,516
Above-market leases
Real Estate Investments
Amortization expense	$ 54	$ 55	$ 160	$ 166

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RELATED PARTY TRANSACTIONS (Tables)

9 Months Ended

Sep. 30, 2019

RELATED PARTY TRANSACTIONS

Summary of Compensation Plan

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

Summary of Total Project Cost

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

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Principal Activity and Significant Accounting Policies - Earnings per common share (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jan. 31, 2019
Earnings per Common Share
Dilutive potential common shares			0	0
Denominators for the basic and diluted earnings per common share	9,322,000	8,840,000	9,208,000	8,730,000
Recent Accounting Pronouncements
Transaction costs capitalized					$ 0

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LINES OF CREDIT

9 Months Ended

Sep. 30, 2019

LINES OF CREDIT

LINES OF CREDIT

NOTE 5 – LINES OF CREDIT

We have a $18,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2021; a $6,315 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires in November 2019; a $5,000 variable rate (floating LIBOR plus 2.00%) line of credit agreement with Bremer Bank, which expires June 2022; and a $3,200 variable rate (LIBOR plus 2.04%) line of credit agreement with Bank of the West, which expires November 2020. The lines of credit are secured by properties in Duluth, Edina, Moorhead and St. Cloud, Minnesota; and Bismarck, Dickinson, Grand Forks and Fargo, North Dakota. At September 30, 2019, there was no balance outstanding on the lines of credit, leaving $32,815 available and unused under the agreements. 

Certain line of credit agreements includes covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios on an annual and semi-annaul basis.  As of December 31, 2018,  three residential properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis.  As of December 31, 2018, the pooled property debt yield was out of compliance with Wells Fargo’s requirement.  Annual waivers were received from the lenders.

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NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

9 Months Ended

Sep. 30, 2019

NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

NOTE 9 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of September 30, 2019 and December 31, 2018, outstanding limited partnership units totaled 17,820,000 and 17,876,000 respectively. For the three months ended September 30, 2019 and 2018, the operating partnership declared distributions of $4,655 and $4,470 respectively, to limited partners which were paid on October 15, 2019 and 2018, respectively.  Distributions per unit were $0.78375 and $0.763125 during the nine months ended September 30, 2019 and 2018, respectively.

During the nine months ended September 30, 2019 Sterling exchanged 1,475 common shares for 1,475 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $28. During the nine months ended September 30, 2018 there were no limited partnership units exchanged for common shares pursuant to redemption requests. 

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