Attached files

file filename
EX-31.2 - EX-31.2 - Sterling Real Estate Trustsret-20150630ex312015ea5.htm
EX-32.1 - EX-32.1 - Sterling Real Estate Trustsret-20150630ex3215ccfbe.htm
EX-31.1 - EX-31.1 - Sterling Real Estate Trustsret-20150630ex311a71787.htm

 

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 June 30, 2015

 

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

(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)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes     No 

 

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

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

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 August 7, 2015

Common Shares of Beneficial Interest,
$0.01 par value per share

 

7,548,085.064453

 

 

 


 

STERLING REAL ESTATE TRUST

 

INDEX

 

Page

 

No.

 

 

PART I.  FINANCIAL INFORMATION 

 

 

 

Item 1.  Financial Statements (unaudited): 

Consolidated Balance Sheets – as of June 30, 2015 (unaudited) and December 31, 2014 (audited) 

Consolidated Statements of Operations and Other Comprehensive Income – Three and six months ended June 30, 2015 and 2014  

Consolidated Statement of Shareholders’ Equity – Six months ended June 30, 2015 

Consolidated Statements of Cash Flows – Six months ended June 30, 2015 and 2014 

Notes to Consolidated Financial Statements 

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

35 

Item 4.  Controls and Procedures 

47 

 

 

PART II.  OTHER INFORMATION 

 

 

 

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

48 

Item 6.  Exhibits 

50 

Signatures 

51 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of JUNE 30, 2015 (UNAUDITED) and December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2015

    

2014

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

Real estate investments

 

$

549,071

 

$

532,263

Cash and cash equivalents

 

 

6,373

 

 

643

Restricted deposits and funded reserves

 

 

5,190

 

 

6,732

Investment in unconsolidated affiliates

 

 

8,932

 

 

9,081

Due from related party

 

 

 —

 

 

109

Receivables

 

 

3,176

 

 

2,953

Prepaid expenses

 

 

1,711

 

 

1,581

Notes receivable

 

 

600

 

 

600

Financing and lease costs, less accumulated amortization of $3,271 in 2015 and $2,985 in 2014

 

 

3,920

 

 

3,761

Assets held for sale

 

 

967

 

 

 —

Intangible assets, less accumulated amortization of $5,496 in 2015 and $4,866 in 2014

 

 

9,664

 

 

9,222

Other assets

 

 

56

 

 

76

 

 

 

 

 

 

 

Total Assets

 

$

589,660

 

$

567,021

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Mortgage notes payable

 

$

337,387

 

$

324,886

Lines of credit

 

 

 —

 

 

16,419

Special assessments payable

 

 

918

 

 

934

Dividends payable

 

 

5,215

 

 

4,554

Due to related party

 

 

464

 

 

2,500

Tenant security deposits payable

 

 

3,302

 

 

3,113

Investment certificates

 

 

145

 

 

319

Unfavorable leases, less accumulated amortization of $636 in 2015 and $572 in 2014

 

 

742

 

 

806

Accounts payable - trade

 

 

1,100

 

 

1,486

Retainage payable

 

 

691

 

 

555

Fair value of interest rate swaps

 

 

255

 

 

272

Deferred insurance proceeds

 

 

113

 

 

72

Accrued expenses and other liabilities

 

 

4,029

 

 

5,471

Total Liabilities

 

 

354,361

 

 

361,387

 

 

 

 

 

 

 

COMMITMENTS and CONTINGENCIES - Note 17

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Noncontrolling interest in operating partnership

 

 

154,622

 

 

150,594

Beneficial interest

 

 

80,932

 

 

55,312

Accumulated comprehensive income (loss)

 

 

(255)

 

 

(272)

Total Shareholders' Equity

 

 

235,299

 

 

205,634

 

 

 

 

 

 

 

 

 

$

589,660

 

$

567,021

 

 

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 SIX MONTHS ENDED JUNE 30, 2015 and 2014 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2015

    

2014

    

2015

    

2014

 

(in thousands, except per share data)

 

(in thousands, except per share data)

Income from rental operations

 

 

 

Real estate rental income

$

22,841

 

$

16,734

 

$

45,075

 

$

33,258

Tenant reimbursements

 

711

 

 

528

 

 

1,302

 

 

1,088

 

 

23,552

 

 

17,262

 

 

46,377

 

 

34,346

Expenses

 

 

 

 

 

 

 

 

 

 

 

Expenses from rental operations

 

 

 

 

 

 

 

 

 

 

 

Interest

 

3,898

 

 

3,082

 

 

7,851

 

 

6,146

Depreciation and amortization

 

4,349

 

 

3,377

 

 

8,599

 

 

6,732

Real estate taxes

 

1,608

 

 

1,262

 

 

3,514

 

 

2,577

Property management fees

 

2,336

 

 

1,610

 

 

4,673

 

 

3,168

Utilities

 

1,751

 

 

1,410

 

 

3,845

 

 

3,117

Repairs and maintenance

 

3,727

 

 

2,674

 

 

7,022

 

 

5,025

Insurance

 

542

 

 

402

 

 

1,138

 

 

800

 

 

18,211

 

 

13,817

 

 

36,642

 

 

27,565

Administration of REIT

 

 

 

 

 

 

 

 

 

 

 

Administrative expenses

 

98

 

 

98

 

 

176

 

 

164

Advisory fees

 

578

 

 

448

 

 

1,148

 

 

891

Acquisition and disposition expenses

 

280

 

 

689

 

 

810

 

 

1,050

Trustee fees

 

12

 

 

10

 

 

23

 

 

24

Legal and accounting

 

86

 

 

65

 

 

333

 

 

225

 

 

1,054

 

 

1,310

 

 

2,490

 

 

2,354

Total expenses

 

19,265

 

 

15,127

 

 

39,132

 

 

29,919

Income from operations

 

4,287

 

 

2,135

 

 

7,245

 

 

4,427

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Equity in income of unconsolidated affiliates

 

282

 

 

228

 

 

487

 

 

475

Dividend and interest income

 

17

 

 

101

 

 

31

 

 

158

Gain on involuntary conversion

 

11

 

 

 —

 

 

11

 

 

24

Gain on disposal of marketable securities

 

 —

 

 

330

 

 

 —

 

 

575

Loss on extinguishment of debt

 

(1)

 

 

 —

 

 

(1)

 

 

 —

 

 

309

 

 

659

 

 

528

 

 

1,232

Net income

$

4,596

 

$

2,794

 

$

7,773

 

$

5,659

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

3,085

 

 

2,017

 

 

5,312

 

 

4,085

Net income attributable to Sterling Real Estate Trust

$

1,511

 

$

777

 

$

2,461

 

$

1,574

Earnings per common share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share, basic and diluted

$

0.20

 

$

0.14

 

$

0.36

 

$

0.29

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

4,596

 

$

2,794

 

$

7,773

 

$

5,659

Other comprehensive income (loss) - change in fair value of interest rate swaps

 

28

 

 

(7)

 

 

17

 

 

2

Comprehensive income

 

4,624

 

 

2,787

 

 

7,790

 

 

5,661

Comprehensive income attributable to noncontrolling interest

 

3,104

 

 

2,011

 

 

5,323

 

 

4,086

Comprehensive income attributable to Sterling Real Estate Trust

$

1,520

 

$

776

 

$

2,467

 

$

1,575

 

 

See Notes to Consolidated Financial Statements

 

4


 

 

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY 

FOR THE SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

Total

 

 

 

 

Accumulated

 

 

 

 

 

Common

 

Paid-in

 

in Excess of

 

Beneficial

 

Noncontrolling

 

Comprehensive

 

 

 

 

    

Shares

    

Capital

    

Earnings

    

Interest

    

Interest

    

Income (Loss)

    

Total

 

 

(in thousands)

BALANCE AT DECEMBER 31, 2014

 

5,624

 

$

69,756

 

$

(14,444)

 

$

55,312

 

$

150,594

 

$

(272)

 

$

205,634

Issuance of common shares

 

1,677

 

 

25,750

 

 

 

 

 

25,750

 

 

 

 

 

 

 

 

25,750

Contribution of assets in exchange for the issuance of noncontrolling interest shares

 

 

 

 

 

 

 

 

 

 

 

 

 

6,049

 

 

 

 

 

6,049

Shares/units redeemed

 

(47)

 

 

(681)

 

 

 

 

 

(681)

 

 

(417)

 

 

 

 

 

(1,098)

Dividends declared

 

 

 

 

 

 

 

(3,371)

 

 

(3,371)

 

 

(6,916)

 

 

 

 

 

(10,287)

Dividends reinvested - stock dividend

 

135

 

 

1,956

 

 

 

 

 

1,956

 

 

 

 

 

 

 

 

1,956

Issuance of shares under optional purchase plan

 

55

 

 

840

 

 

 

 

 

840

 

 

 

 

 

 

 

 

840

Syndication costs

 

 

 

 

 

 

 

(1,335)

 

 

(1,335)

 

 

 —

 

 

 

 

 

(1,335)

Decrease in fair value of interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

 

17

Net income

 

 

 

 

 

 

 

2,461

 

 

2,461

 

 

5,312

 

 

 

 

 

7,773

BALANCE AT JUNE 30, 2015

 

7,444

 

$

97,621

 

$

(16,689)

 

$

80,932

 

$

154,622

 

$

(255)

 

$

235,299

 

 

See Notes to Consolidated Financial Statements

 

 

5


 

 

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2015 and 2014 (UNAUDITED) 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2015

    

2014

 

 

(in thousands)

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

7,773

 

$

5,659

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

Net gain on investment in marketable securities

 

 

 —

 

 

(524)

Equity in income of unconsolidated affiliates

 

 

(487)

 

 

(475)

Distributions of earnings of unconsolidated affiliates

 

 

487

 

 

493

Depreciation

 

 

7,624

 

 

5,821

Amortization

 

 

993

 

 

911

Effects on operating cash flows due to changes in

 

 

 

 

 

 

Restricted deposits - tenant security deposits

 

 

(721)

 

 

(172)

Restricted deposits - real estate tax and insurance escrows

 

 

1,041

 

 

(2,058)

Due from related party

 

 

109

 

 

59

Receivables

 

 

104

 

 

641

Prepaid expenses

 

 

(130)

 

 

629

Marketable securities

 

 

 —

 

 

(7,152)

Other assets

 

 

20

 

 

(321)

Due to related party

 

 

(2,036)

 

 

175

Tenant security deposits payable

 

 

127

 

 

178

Accounts payable - trade

 

 

(582)

 

 

(263)

Accrued expenses and other liabilities

 

 

(1,513)

 

 

906

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

12,809

 

 

4,507

INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of real estate investment properties

 

 

(4,542)

 

 

(4,135)

Capital expenditures and tenant improvements

 

 

(2,507)

 

 

(3,705)

Proceeds from involuntary conversion

 

 

10

 

 

47

Investment in unconsolidated affiliates

 

 

(35)

 

 

(647)

Distributions in excess of earnings received from unconsolidated affiliates

 

 

184

 

 

139

Restricted deposits - replacement reserve escrows

 

 

1,222

 

 

13

Deferred insurance proceeds

 

 

 —

 

 

120

NET CASH USED IN INVESTING ACTIVITIES

 

 

(5,668)

 

 

(8,168)

FINANCING ACTIVITIES

 

 

 

 

 

 

Payments for financing and lease costs

 

 

(581)

 

 

(70)

Payments on investment certificates

 

 

(174)

 

 

(6)

Reinvested proceeds from investment certificates

 

 

 —

 

 

8

Principal payments on special assessments payable

 

 

(66)

 

 

(11)

Proceeds from issuance of mortgage notes payable

 

 

9,636

 

 

2,863

Principal payments on mortgage notes payable

 

 

(10,295)

 

 

(3,835)

Advances on lines of credit

 

 

9,626

 

 

5,180

Payments on lines of credit

 

 

(26,045)

 

 

(3,758)

Proceeds from issuance of common shares

 

 

25,750

 

 

 —

Proceeds from issuance of shares under optional purchase plan

 

 

840

 

 

811

Shares/units redeemed

 

 

(1,098)

 

 

(3,812)

Dividends/distributions paid

 

 

(7,669)

 

 

(6,773)

Payment of syndication costs

 

 

(1,335)

 

 

 —

NET CASH USED IN FINANCING ACTIVITIES

 

 

(1,411)

 

 

(9,403)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

5,730

 

 

(13,064)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

643

 

 

13,849

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

6,373

 

$

785

 

See Notes to Consolidated Financial Statements

6


 

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2015 and 2014 (UNAUDITED) (Continued)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2015

    

2014

 

 

(in thousands)

SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

 

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

 

$

7,698

 

$

6,184

 

 

 

 

 

 

 

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

Dividends reinvested

 

$

1,956

 

$

1,568

Dividends declared and not paid

 

 

1,731

 

 

1,220

UPREIT distributions declared and not paid

 

 

3,484

 

 

3,263

UPREIT units converted to REIT common shares

 

 

 —

 

 

23

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

 

 

6,049

 

 

13,706

Contributed assets in real estate venture

 

 

 —

 

 

1,316

Purchase of subsidiary ownership from noncontrolling interest in exchange for the issuance of noncontrolling interest units in UPREIT

 

 

 —

 

 

791

Increase in land improvements due to increase in special  assessments payable

 

 

47

 

 

135

Unrealized gain (loss) on interest rate swaps

 

 

(17)

 

 

(2)

Acquisition of assets with new financing

 

 

10,230

 

 

 —

Acquisition of assets through assumption of debt and liabilities

 

 

370

 

 

740

Capitalized interest related to construction in progress

 

 

62

 

 

 —

Acquisition of assets with accounts payable

 

 

2,955

 

 

1,149

 

 

See Notes to Consolidated Financial Statements

 

 

7


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (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 November 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 June 30, 2015 and December 31, 2014, Sterling owned approximately 33.19% and 27.77%, 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, 2014, 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 June 30, 2015 and consolidated statements of operations and other comprehensive income, consolidated statement of shareholders’ equity, and consolidated statements of cash flows for the three and six months ended June 30, 2015 and 2014, 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 months and six months ended June 30, 2015. 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 141 properties.  The Trust’s 93 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multi-family apartment buildings.  The Trust owns 48 commercial

8


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Texas and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties.  Presently, the Trust’s mix of properties is 72.9% residential and 27.1% commercial (based on cost) and total $549,071 in real estate investments at June 30, 2015.  

 

 

 

 

 

 

 

 

 

Residential Property

    

Location

    

No. of Properties

    

Units

 

 

North Dakota

 

74

 

4,886

 

 

Minnesota

 

16

 

3,027

 

 

Missouri

 

1

 

164

 

 

Nebraska

 

2

 

316

 

 

 

 

93

 

8,393

 

 

 

 

 

 

 

Commercial Property

    

Location

    

No. of Properties

    

Sq. Ft

 

 

North Dakota

 

21

 

832,908

 

 

Arkansas

 

2

 

29,370

 

 

Colorado

 

1

 

13,390

 

 

Iowa

 

1

 

32,532

 

 

Louisiana

 

1

 

14,560

 

 

Michigan

 

1

 

11,737

 

 

Minnesota

 

13

 

360,306

 

 

Mississippi

 

1

 

14,820

 

 

Texas

 

1

 

7,296

 

 

Wisconsin

 

6

 

74,916

 

 

 

 

48

 

1,391,835

 

 

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

 

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition. Significant factors included in the independent appraisal include items such as current rent schedules, occupancy levels, and discount factors. Property valuations are completed primarily using the income capitalization approach, in which anticipated benefits are converted to an indication of current value.

 

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each

9


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

tenant’s lease, our overall relationship with that respective tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

 

The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

 

We estimate the in-place lease value for each lease acquired. This fair value estimate is calculated using factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, and the current economic climate.

 

Our analysis results in three discrete financial items: assets for above market leases, liabilities for below market leases, and assets for the in-place lease value. The calculation of each of these components is performed in tandem to provide a complete intangible asset value.

 

Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

 

Furniture and fixtures are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. 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 and fixtures

 

9 years

 

Depreciation expense for the three months ended June 30, 2015 and 2014 totaled $3,855 and $2,937, respectively. Depreciation expense for the six months ended June 30, 2015 and 2014 totaled $7,624 and $5,821, 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. 

 

10


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

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 financial 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.  Based on evaluation, there were no impairment losses during the three and six months ended June 30, 2015 and 2014

 

Properties Held for Sale

 

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

 

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

11


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

·

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 ASC 205, Presentation of Financial Statements (“ASC 205”) if the following condition is met:

 

·

represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

 

There was one parcel of land classified as held for sale at June 30, 2015.  There were no properties classified as held for sale at December 31, 2014 See Note 18 and 20.

 

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.

 

Cash and Cash Equivalents

 

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.

 

Investment in Unconsolidated Affiliates

 

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the three and six months ended June 30, 2015 and 2014.  

 

The operating partnership owns a 40.26% interest in a single asset limited liability company which owns a 144 unit residential, multi-family apartment complex in Bismarck, North Dakota. The property is encumbered by a first mortgage with a balance at June 30, 2015 and December 31, 2014 of $2,291 and $2,323, respectively. We owed $922 and $935 of our respective share of the mortgage loan balance as of June 30, 2015 and December 31, 2014, respectively.  The Company is jointly and severally liable for the full mortgage balance.

 

The operating partnership is a 50% owner of Grand Forks Marketplace Retail Center through 100% ownership in a limited liability company.  Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at June 30, 2015 and December 31, 2014 of $11,170 and $11,260, respectively. We owed $5,585 and $5,630 for our respective share of the

12


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

mortgage loan balance as of June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014 of $7,153 and $7,221, respectively. We owed $4,769 and $4,814 for our respective share of the mortgage loan balance on June 30, 2015 and December 31, 2014, respectively. The Company is jointly and severally liable for the full mortgage balance.

 

The operating partnership owns an 82.50% interest as a tenant in common in a 61 unit residential, multi-family apartment complex in Fargo, North Dakota. The property was unencumbered at June 30, 2015 and December 31, 2014, respectively.

 

The operating partnership is a 99% owner of Michigan Street Transit Center, LLC (“Transit Center”) through 100% ownership in a limited liability company. The operating partnership has contributed approximately $644 in cash and $1,316 in property contributions to the Transit Center in May and June 2014, respectively. As of June 30, 2015, the property owned by the Transit Center consisted of land previously occupied by a building and parking ramp in Duluth, Minnesota which were both demolished during 2014.  The property was unencumbered at June 30, 2015 and December 31, 2014, respectively.

 

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

 

In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns.  As of June 30, 2015, we assessed one of our liability company arrangements as a variable interest entity where we were not the primary beneficiary.  In addition, four of 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 June 30, 2015 and December 31, 2014, the unconsolidated affiliates held total assets of $31,665 and $32,459 and mortgage notes payable of $20,614 and $20,804, respectively.

 

Receivables

 

Receivables consist primarily of amounts due for rent and real estate taxes. The receivables are non-interest bearing.  The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected.  As of June 30, 2015 and December 31, 2014, management determined no allowance was necessary for uncollectible receivables.

 

13


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

Financing and Lease Costs

 

Financing costs have been capitalized and are being amortized over the life of the financing using the effective interest method.  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.

 

Intangible Assets

 

Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases 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 June 30, 2015 and December 31, 2014.

 

Noncontrolling Interest

 

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.

 

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

 

We intend to continue to qualify as a REIT and, as such, will not be taxed on the portion of the income that is distributed to the 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.

 

14


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of June 30, 2015 and December 31, 2014 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 2012.

 

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 recognize revenue in accordance with ASC Topic 605, Revenue Recognition, (“ASC Topic 605”).  ASC Topic 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.

 

We derive over 95% of our revenues from tenant rents and other tenant-related activities. We lease multi-family units under operating leases with terms of one year or less. Rental income and other property revenues are recorded when due from tenants and recognized monthly as earned pursuant to the terms of the underlying leases.  Other property revenues consist primarily of laundry, application and other fees charged to tenants. 

 

We lease commercial space primarily under long-term lease agreements. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and a straight-line rent adjustment. We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $109 and $56 for the three months ended June 30, 2015 and 2014, respectively. The straight-line rent adjustment increased revenue by $142 and $133 for the six months ended June 30, 2015 and 2014, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of June 30, 2015 and December 31, 2014 was $2,680 and $2,538, 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.

 

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 June 30, 2015 and 2014, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

 

For the three months ended June 30, 2015 and 2014, Sterling’s denominators for the basic and diluted earnings per common share were approximately 7,436,000 and 5,443,000, respectively. For the six months ended June 30, 2015 and 2014, Sterling’s denominators for the basic and diluted earnings per common share were approximately 6,875,000 and 5,441,000, respectively.

 

 

15


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”).  In accordance with ASU 2014-08, a discontinued operation represents (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on an entity’s financial results, or (ii) an acquired business that is classified as held for sale on the date of acquisition. A strategic shift could include a disposal of (i) a separate major line of business, (ii) a separate major geographic area of operations, (iii) a major equity method investment, or (iv) other major parts of an entity. The standard requires prospective application and will be effective for interim and annual periods beginning on or after December 15, 2014 with early adoption permitted. The standard is not applied to components of an entity that were sold or classified as held for sale prior to the adoption of the standard.

 

We have elected to adopt this standard early, effective January 1, 2014, which primarily has the impact of reflecting gains and losses on the sale of operating properties prospectively within continuing operations, and results in not classifying the operations of such operating properties as discontinued operations in all periods presented. Subsequent to our adoption of ASU 2014-08, the sale of real estate that does not meet the definition of a discontinued operation under the standard will be included in gain on sale of operating properties in our consolidated statements of operations and other comprehensive income.

 

In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers, which was issued by the FASB as Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, supersedes most current GAAP applicable to revenue recognition and converges U.S. and international accounting standards in this area. The core principle of the new guidance is that revenue shall only be recognized when an entity has transferred control of goods or services to a customer and for an amount reflecting the consideration to which the entity expects to be entitled for such exchange. In July 2015, the FASB decided to defer the effective date for annual reporting periods beginning after December 15, 2017.  Early adoption is permitted beginning on the original effective date of December 15, 2016. Upon adoption, ASU 2014-09 allows for full retrospective adoption applied to all periods presented or modified retrospective adoption with the cumulative effect of initially applying the standard recognized at the date of initial application. We have not yet determined the effect ASU 2014-09 will have on our consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). This amends ASC 810, Consolidation (ASC "810"), to improve targeted areas of consolidation guidance by simplifying the requirements of consolidation and placing more emphasis on risk of loss when determining a controlling financial interest. ASU 2015-02 is effective for the annual period ending after December 15, 2015, and subsequent interim and annual periods with early adoption permitted. The adoption of ASU 2015-02 is not expected to have a material impact on the Company's consolidated financial statements.

 

In April 2015, the Financial Accounting Standards Board issued ASU No. 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The objective of ASU 2015-03 is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This ASU is effective for annual reporting periods (including interim periods within those

16


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

periods) beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the new guidance and has not determined the impact, if any, this standard may have on the consolidated financial statements.

 

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.

 

Reclassifications

 

Certain amounts previously reported in our quarterly report ended June 30, 2014 have been reclassified to conform to cash flows presentations in 2015.

 

NOTE 3 – segment reporting

 

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multi-family 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, legal and professional fees and certain general and administrative expenses.  The accounting policies of each segment are consistent with those described in Note 2 of this report.

 

Segment Revenues and Net Operating Income

 

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and six months ended June 30, 2015 and 2014, 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  June 30, 2015

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Income from rental operations

 

$

18,901

 

$

4,651

 

$

23,552

Expenses from rental operations

 

 

9,176

 

 

788

 

 

9,964

Net operating income

 

$

9,725

 

$

3,863

 

$

13,588

Interest

 

 

 

 

 

 

 

 

3,898

Depreciation and amortization

 

 

 

 

 

 

 

 

4,349

Administration of REIT

 

 

 

 

 

 

 

 

1,054

Other (income)/expense

 

 

 

 

 

 

 

 

(309)

Net income

 

 

 

 

 

 

 

$

4,596

17


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30, 2014

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Income from rental operations

 

$

12,909

 

$

4,353

 

$

17,262

Expenses from rental operations

 

 

6,647

 

 

711

 

 

7,358

Net operating income

 

$

6,262

 

$

3,642

 

$

9,904

Interest

 

 

 

 

 

 

 

 

3,082

Depreciation and amortization

 

 

 

 

 

 

 

 

3,377

Administration of REIT

 

 

 

 

 

 

 

 

1,310

Other (income)/expense

 

 

 

 

 

 

 

 

(659)

Net income

 

 

 

 

 

 

 

$

2,794

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2015

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Income from rental operations

 

$

37,320

 

$

9,057

 

$

46,377

Expenses from rental operations

 

 

18,579

 

 

1,613

 

 

20,192

Net operating income

 

$

18,741

 

$

7,444

 

$

26,185

Interest

 

 

 

 

 

 

 

 

7,851

Depreciation and amortization

 

 

 

 

 

 

 

 

8,599

Administration of REIT

 

 

 

 

 

 

 

 

2,490

Other (income)/expense

 

 

 

 

 

 

 

 

(528)

Net income

 

 

 

 

 

 

 

$

7,773

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Income from rental operations

 

$

25,525

 

$

8,821

 

$

34,346

Expenses from rental operations

 

 

13,162

 

 

1,525

 

 

14,687

Net operating income

 

$

12,363

 

$

7,296

 

$

19,659

Interest

 

 

 

 

 

 

 

 

6,146

Depreciation and amortization

 

 

 

 

 

 

 

 

6,732

Administration of REIT

 

 

 

 

 

 

 

 

2,354

Other (income)/expense

 

 

 

 

 

 

 

 

(1,232)

Net income

 

 

 

 

 

 

 

$

5,659

 

18


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

Segment Assets and Accumulated Depreciation

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Real estate investments

 

$

460,658

 

$

154,894

 

$

615,552

Accumulated depreciation

 

 

(44,583)

 

 

(21,898)

 

 

(66,481)

 

 

$

416,075

 

$

132,996

 

 

549,071

Cash and cash equivalents

 

 

 

 

 

 

 

 

6,373

Restricted deposits and funded reserves

 

 

 

 

 

 

 

 

5,190

Investment in unconsolidated affiliates

 

 

 

 

 

 

 

 

8,932

Receivables and other assets

 

 

 

 

 

 

 

 

5,543

Financing  and lease costs, less accumulated amortization

 

 

 

 

 

 

 

 

3,920

Assets held for sale

 

 

 

 

 

 

 

 

967

Intangible assets, less accumulated amortization

 

 

 

 

 

 

 

 

9,664

Total Assets

 

 

 

 

 

 

 

$

589,660

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Real estate investments

 

$

438,609

 

$

152,527

 

$

591,136

Accumulated depreciation

 

 

(38,729)

 

 

(20,144)

 

 

(58,873)

 

 

$

399,880

 

$

132,383

 

 

532,263

Cash and cash equivalents

 

 

 

 

 

 

 

 

643

Restricted deposits and funded reserves

 

 

 

 

 

 

 

 

6,732

Investment in unconsolidated affiliates

 

 

 

 

 

 

 

 

9,081

Receivables and other assets

 

 

 

 

 

 

 

 

5,319

Financing  and lease costs, less accumulated amortization

 

 

 

 

 

 

 

 

3,761

Intangible assets, less accumulated amortization

 

 

 

 

 

 

 

 

9,222

Total Assets

 

 

 

 

 

 

 

$

567,021

 

 

 

note 4 – real estate investments

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Land and land improvements

 

$

61,859

 

$

29,497

 

$

91,356

Building and improvements

 

 

375,515

 

 

124,890

 

 

500,405

Furniture, fixtures and equipment

 

 

23,212

 

 

1,466

 

 

24,678

Construction in progress

 

 

72

 

 

8

 

 

80

 

 

 

460,658

 

 

155,861

 

 

616,519

Less accumulated depreciation

 

 

(44,583)

 

 

(21,898)

 

 

(66,481)

 

 

 

416,075

 

 

133,963

 

 

550,038

Less real estate investments

 

 

 

 

 

 

 

 

 

included in assets held for sale

 

 

 -

 

 

(967)

 

 

(967)

 

 

 

 

 

 

 

 

 

 

 

 

$

416,075

 

$

132,996

 

$

549,071

 

 

 

 

 

 

 

 

 

 

 

 

 

19


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

As of December 31, 2014

    

Residential

    

Commercial

    

Total

 

 

(in thousands)

Land and land improvements

 

$

59,267

 

$

28,285

 

$

87,552

Building and improvements

 

 

353,750

 

 

122,776

 

 

476,526

Furniture, fixtures and equipment

 

 

21,423

 

 

1,466

 

 

22,889

Construction in progress

 

 

4,169

 

 

 —

 

 

4,169

 

 

 

438,609

 

 

152,527

 

 

591,136

Less accumulated depreciation

 

 

(38,729)

 

 

(20,144)

 

 

(58,873)

 

 

$

399,880

 

$

132,383

 

$

532,263

 

Construction in progress consists of costs associated with the development of a new, four building 156 unit multi-family apartment community under construction in Bismarck, North Dakota.  The project was substantially completed in June 2015.  We have a construction contract of $14,133, of which $13,829 has been completed to date, including $691 of retainage which is included in payables at quarter-end. The Company is working with GOLDMARK Development Corporation, a related party, as the general contractor for the project.  Building one, two, three and four were placed in service August 2014, October 2014, February 2015, and June 2015, respectively.  Approximately $14,116 was reclassified from construction in progress.  See Note 15 for additional information.

 

NOTE 5 – NOTES RECEIVABLE

 

Notes receivable consisted of a $600 note to an unaffiliated party to provide working capital and for improvements on a residential property bearing interest at a rate of 6.5% and is personally guaranteed by the owner.  Accrued interest is due monthly beginning in October 2014 until the note is paid in full.  The principal plus accrued interest will be due and payable on the earlier of 1) within ninety days of the lender’s demand, which demand may be made at any time after June 1, 2015 or 2) August 31, 2016.

 

 

 

 

NOTE 6 - Lease intangibles

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease

 

Accumulated

 

Lease

As of June 30, 2015

    

Intangibles

    

Amortization

    

Intangibles, net

Intangible Assets

 

(in thousands)

In-place leases

 

$

12,303

 

$

(4,931)

 

$

7,372

Above-market leases

 

 

2,857

 

 

(565)

 

 

2,292

 

 

$

15,160

 

$

(5,496)

 

$

9,664

Intangible Liabilities

 

 

 

 

 

 

 

 

 

Below-market leases

 

$

(1,378)

 

$

636

 

$

(742)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease

 

Accumulated

 

Lease

As of December 31, 2014

    

Intangibles

    

Amortization

    

Intangibles, net

Intangible Assets

 

(in thousands)

In-place leases

 

$

11,622

 

$

(4,385)

 

$

7,237

Above-market leases

 

 

2,466

 

 

(481)

 

 

1,985

 

 

$

14,088

 

$

(4,866)

 

$

9,222

Intangible Liabilities

 

 

 

 

 

 

 

 

 

Below-market leases

 

$

(1,378)

 

$

572

 

$

(806)

20


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (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)

2016

 

$

1,270

 

$

143

2017

 

 

1,270

 

 

143

2018

 

 

1,270

 

 

143

2019

 

 

1,270

 

 

143

2020

 

 

1,270

 

 

143

Thereafter

 

 

3,314

 

 

27

 

 

$

9,664

 

$

742

 

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of June 30, 2015 was 12.2 years.

 

NOTE 7 – LINES OF CREDIT

 

We have a $19,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2018; a $3,000 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires November 2019;  and a $3,315 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires November 2019. The lines of credit are secured by properties in Duluth, Minnesota; Minneapolis/St. Paul, Minnesota; Austin, Texas; Mandan, North Dakota; Fargo, North Dakota; St. Cloud, Minnesota; Moorhead, Minnesota; and Grand Forks, North Dakota.  We also have a $2,000 variable rate (prime rate less 0.5%) unsecured line of credit agreement with Bremer Bank, which expires October 2015; and a $3,000 variable rate (prime rate) unsecured line of credit agreement with Bell State Bank & Trust, which expires December 2015.  At June 30, 2015, there was no balance outstanding on the lines of credit, leaving $29,315 available and unused under the agreements. 

 

Certain line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.  As a result of the December 19, 2014 suburban Minneapolis, Minnesota portfolio acquisition the Company was out of compliance with Bremer’s post distribution debt service coverage ratio requirement on a consolidated basis on the secured line of credit as of December 31, 2014. A waiver was received from the lender.  As of June 30,  2015, we were in compliance with all covenants.

 

 

21


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

NOTE 8 - MORTGAGE NOTES PAYABLE

 

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

 

 

 

 

 

 

 

 

 

Principal Balance At

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(in thousands)

Fixed rate mortgage notes payable (a)

 

$

327,135

 

$

318,554

Variable rate construction loan (b)

 

 

10,252

 

 

6,332

Mortgage notes payable

 

$

337,387

 

$

324,886

(a)

Includes $3,207 and $3,254 of variable rate mortgage debt that was swapped to a fixed rate as of June 30, 2015 and December 31, 2014, respectively.

(b)

The variable rate construction loan bears interest at a floating rate of London Interbank Offered Rate (LIBOR) plus 2.50%.

 

Mortgage loan payables, net were $337,387 and $324,886 as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, we had 94 fixed rate and 1 variable rate mortgage loans with effective interest rates ranging from 2.57% to 7.65% per annum and a weighted average effective interest rate of 4.61% per annum. As of June 30, 2015, we had $327,135 of fixed rate debt, or 96.96% of mortgage loan payables, net at a weighted average interest rate of 4.67% per annum and $10,252 of variable rate debt, or 3.04% of mortgage loan payables, net at a weighted average effective interest rate of 2.68% per annum.

 

As of December 31, 2014, we had 90 fixed rate and 1 variable rate mortgage loans with effective interest rates ranging from 2.57% to 7.65% per annum, and a weighted average effective interest rate of 4.70% per annum. As of December 31, 2014, we had $318,554 of fixed rate debt, or 98.05% of mortgage loan payables, at a weighted average interest rate of 4.74% per annum and $6,332 of variable rate debt, or 1.95% of mortgage loan payables, net at a weighted average effective interest rate of 2.66% 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 with lender.

 

 

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As a result of the December 19, 2014 suburban Minneapolis, Minnesota portfolio acquisition, as of December 31, 2014 the Company was out of compliance with Bremer’s post distribution debt service coverage ratio requirement on a consolidated basis.  In addition, two loans on residential properties were out of compliance at year-end due to unit renovation repair and maintenance costs.  One loan is secured by a property located in Fargo, North Dakota with an outstanding balance of $295 and the other loan is secured by properties located in Fargo, North Dakota with an outstanding balance of $3,446 at December 31, 2014.  The loans were out of compliance with the lender’s debt service coverage ratio requirement as of December 31, 2014. Waivers have been received from the lenders. As of June 30,  2015, we were in compliance with all covenants.    

 

22


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

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

 

 

 

 

 

 

Years ending December 31,

    

Amount

 

 

(in thousands)

2015 (July 1, 2015 to December 31, 2015)

 

$

5,152

2016

 

 

22,239

2017

 

 

34,234

2018

 

 

14,724

2019

 

 

21,967

Thereafter

 

 

239,071

Total payments

 

$

337,387

 

 

 

NOTE 9 – HEDGING ACTIVITIES

 

As part of our interest rate risk management strategy, we use 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 have entered into interest rate swaps in the notional amount of $1,294 and $2,450 to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature in April 2020 and December 2017, respectively.  The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception.

 

The carrying amount of the swaps have been adjusted to their fair values 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 swaps are accounted for as effective hedges in accordance with ASC 815-20 whereby they are recorded at fair value and changes in fair value are recorded to comprehensive income. As of June 30, 2015 and December 31, 2014, we have recorded a liability and other comprehensive loss of $255 and $272, respectively.

 

 

 

 

 

NOTE 10 - FAIR VALUE MEASUREMENT 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

Carrying

 

 

 

 

Carrying

 

 

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

(in thousands)

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage notes payable

 

$

337,387

 

$

344,459

 

$

324,886

 

$

336,646

Fair value of interest rate swaps

 

$

255

 

$

255

 

$

272

 

$

272

 

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. 

 

23


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

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

 

·

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

·

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

·

Level 3 – Instruments whose significant inputs are unobservable.

 

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)

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of interest rate swaps

 

$

 —

 

$

255

 

$

 —

 

$

255

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of interest rate swaps

 

$

 —

 

$

272

 

$

 —

 

$

272

 

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 June 30, 2015 and December 31, 2014, 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 9.

 

24


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

Fair Value Disclosures

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage notes payable

 

$

 —

 

$

 —

 

$

344,459

 

$

344,459

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage notes payable

 

$

 —

 

$

 —

 

$

336,646

 

$

336,646

 

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 4.13% to 4.50% and from 3.94% to 4.41% at June 30, 2015 and December 31, 2014, 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 June 30, 2015.  The Company’s mortgage notes payable are further described in Note 8.

 

NOTE 11 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

 

As of June 30, 2015 and December 31, 2014, outstanding limited partnership units totaled 14,987,000 and 14,621,000 respectively. As of June 30, 2015 and 2014, the operating partnership declared distributions of $3,484 and $3,263 respectively, to limited partners paid in July 2015 and 2014, respectively.  Distributions per unit were $0.4650 and $0.4500 during the six months ended June 30, 2015 and 2014, respectively.

 

During the six months ended June 30, 2015, there were no limited partnership units exchanged for common shares pursuant to redemption requests. During the six months ended June 30, 2014, Sterling exchanged 2,000 common shares for 2,000 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $23. 

 

At the sole and absolute discretion of the limited partnership, and so long as a Redemption Plan exists, 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 less 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.

 

25


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

NOTE 12 – REDEMPTION PLANS

 

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans.

 

Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $30,000 worth of securities. Currently, the fixed redemption price is $14.50 per share or unit under the plans which price became effective February 1, 2015.

 

We may redeem securities under the plans provided the aggregate total has not been exceeded if 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 six months ended June 30, 2015 and 2014, the Company redeemed 47,000 and 203,000 common shares valued at $681 and $2,836, respectively.  In addition, during the six months ended June 30, 2015 and 2014, the Company redeemed 29,000 and 70,000 units valued at $417 and $976, respectively.

 

NOTE 13 – BENEFICIAL INTEREST

 

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the beneficial interest of Sterling. As of June 30, 2015 and December 31, 2014, there were 7,444,000 and 5,624,000 common shares outstanding. We had no preferred shares outstanding as of either date.

 

Dividends paid to holders of common shares were $0.4650 per share and $0.4500 per share for the six months ended June 30, 2015 and 2014, respectively.

 

NOTE 14 – DIVIDEND REINVESTMENT PLAN

 

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges. 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.

 

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 $5 per fiscal quarter without our prior approval. The purchase prices 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. The estimated value per common share was $15.50 and $15.00 at June 30, 2015 and December 31, 2014, respectively. See discussion of determination of estimated value in Note 19.

 

Therefore, the purchase price per common share for dividend reinvestments was $14.725 and $14.25 and for additional optional cash purchases was $15.50 and $15.00 at June 30, 2015 and December 31, 2014, respectively. The Board, in its

26


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

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 six months ended June 30, 2015, 135,000 shares were issued pursuant to dividend reinvestments and 55,000 shares were issued pursuant to additional optional cash purchases under the plan.  In the six months ended June 30, 2014, 114,000 shares were issued pursuant to dividend reinvestments and 56,000 shares were issued pursuant to additional optional cash purchases under the plan.

 

NOTE 15 – RELATED PARTY TRANSACTIONS

 

Property Management Fee

 

During the six months ended June 30, 2015 and 2014, we paid property management fees to GOLDMARK Property Management in an amount equal to 5% of rents of the properties managed. GOLDMARK Property Management is owned in part by Kenneth Regan and James Wieland. For the six months ended June 30, 2015 and 2014, we paid management fees of $4,643 and $3,131, respectively, to GOLDMARK Property Management.

 

Board of Trustee Fees

 

We incurred Trustee fees of $23 and $24 during the six months ended June 30, 2015 and 2014, respectively.  As of June 30, 2015, and December 31, 2014 we owed our Trustees $56 and $32 for unpaid board of trustee fees, respectively.  There is no cash retainer paid to Trustees.  Instead, we pay Trustees specific amounts for meetings attended.  In March 2014, our Board revised the Trustee Compensation Plan effective January 1, 2014. 

 

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 be 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 27, 2015, effective January 1, 2015. 

 

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

27


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

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.

 

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.

 

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

 

Financing Fee:  0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility.

 

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

010M

 

5.0

%

 

0  –.5M

 

0M – 5.0% x (TC – 0M)

10M - 20M

 

4.5

%

 

.5 M – .95M

 

.50M – 4.5% x (TC – 10M)

20M30M

 

4.0

%

 

.95 M – 1.35M

 

.95M – 4.0% x (TC – 20M)

30M40M

 

3.5

%

 

1.35 M – 1.70M

 

1.35M – 3.5% x (TC – 30M)

40M50M

 

3.0

%

 

1.70 M – 2.00M

 

1.70M – 3.0% x (TC – 40M)

 

TC = Total Project Cost

 

Management Fees

 

During the six months ended June 30, 2015 and 2014, we incurred advisory management fees of $1,148 and $891 with Sterling Management, LLC, our Advisor, for advisory management fees. As of June 30, 2015 and December 31, 2014, we owed our Advisor $383 and $342, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations.

 

Acquisition Fees

 

During the six months ended June 30, 2015 and 2014, we incurred acquisition fees of $530 and $487, respectively, with our Advisor. There were no acquisition fees owed to our Advisor as of June 30, 2015.  As of December 31, 2014, we owed our Advisor $1,875 for unpaid acquisition fees.    

 

Financing Fees

 

During the six months ended June 30, 2015 and 2014, we incurred financing fees of $58 and $11 with our Advisor for loan financing and refinancing activities. There were no financing fees owed to our Advisor as of June 30, 2015.  As of December 31, 2014, we owed our Advisor $214 for unpaid financing fees.    

 

28


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

Disposition Fees

 

During the six months ended June 30, 2015 and 2014, there were no disposition fees incurred with our Advisor.  See Note 18. There were no disposition fees owed to our Advisor as of June 30, 2015 and December 31, 2014, respectively.

 

Development Fees

 

During the six months ended June 30, 2015, we incurred $340 in development fees with our Advisor. During the six months ended June 30, 2014, there were no development fees incurred with our Advisor.  As of June 30, 2015 and December 31, 2014, we owed our Advisor $70 and $36 for unpaid development fees as part of a 10% hold back, respectively.

 

Commissions

 

During the six months ended June 30, 2015 and 2014, we incurred real estate commissions of $303 and $535, respectively, owed to GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc., which is controlled by Messrs. Regan and Wieland. There were no outstanding commissions owed as of June 30, 2015.  As of December 31, 2014, we owed commissions of $750.  

 

During the six months ended June 30, 2015, we incurred brokerage fees of $931 to a broker-dealer benefiting Dale Lian, a shareholder of Sterling and a member of our Advisor.  Brokerage fees were based on 7% of the purchase price of Sterling common shares sold.  There were no outstanding brokerage fees owed to Dale Lian or entities benefiting Dale Lian as of June 30, 2015.  We did not incur any brokerage fees to Dale Lian or entities benefiting Dale Lian in 2014.

 

During the six months ended June 30, 2015, we incurred brokerage fees of $348 to a broker-dealer benefiting James Echtenkamp, a shareholder of Sterling and a member of our Advisor.  Brokerage fees were based on 7% of the purchase price of Sterling common shares sold.  There were no outstanding brokerage fees owed to James Echtenkamp or entities benefiting James Echtenkamp as of June 30, 2015.  We did not incur any brokerage fees to James Echtenkamp or entities benefiting James Echtenkamp in 2014.

 

Rental Income

 

During the six months ended June 30, 2015 and 2014, we received rental income of $107 and $90, respectively, under an operating lease agreement with GOLDMARK Property Management.

 

During the six months ended June 30, 2015 and 2014, we received rental income of $25 and $25, respectively, under an operating lease agreement with GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc. 

 

During the six months ended June 30, 2015 and 2014, we received rental income of $22 and $21, respectively, under operating lease agreements with our Advisor.

 

Construction Costs

 

As of June 30, 2015 and 2014, we incurred costs related to the construction of a 156 unit apartment community in Bismarck, North Dakota of $13,829 and $5,851 to GOLDMARK Development, respectively.  As of June 30, 2015 and December 31, 2014, we owed GOLDMARK Development $691 and $555, respectively, for retainage.  In addition as of June 30, 2015 and December 31, 2014 we owed GOLDMARK Development $337 and $477, respectively, for unpaid construction fees.

 

29


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

NOTE 16 - RENTALS UNDER OPERATING LEASES / RENTAL INCOME

 

Residential apartment units are rented to individual tenants with lease terms of one year or less. Gross revenues from residential rentals totaled $37,320 and $25,525 for the six months ended June 30, 2015 and 2014, respectively.

 

Commercial properties are leased to tenants under terms expiring at various dates through 2034. Lease terms often include renewal options.  For the six months ended June 30, 2015 and 2014, gross revenues from commercial property rentals, including CAM income (common area maintenance) of $1,302 and $1,088, respectively, totaled $9,057 and $8,821, respectively.

 

NOTE 17 - 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.

 

NOTE 18DISPOSITIONS

 

During the six months ended June 30, 2015 there were no dispositions.

 

During the year ended December 31, 2014 the operating partnership sold a 14,736 square foot office property in Norfolk, Nebraska for approximately $625 and recognized a gain of approximately $69.

 

 

 

 

30


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

NOTE 19 – BUSINESS COMBINATIONS AND ACQUISITIONS

 

We continue to implement our strategy of acquiring properties in desired markets.

 

Purchases during the six months ended June 30, 2015

 

In January 2015, the operating partnership purchased a 24 unit duplex complex in Grand Forks, North Dakota for approximately $2,148.  The purchase was financed with the issuance of limited partnership units valued at approximately $2,148. 

 

In January 2015, the operating partnership purchased a 22,293 square foot implement dealership in Bismarck, North Dakota for approximately $3,416.  The purchase was financed with a combination of a $2,600 loan and cash. 

 

In February 2015, the operating partnership purchased a 164 unit apartment complex in Springfield, Missouri for approximately $10,900.  The purchase was financed with a combination of a $7,630 loan, assumed liabilities of $71 and cash. 

 

In May 2015, the operating partnership purchased a 62 unit apartment complex in Bismarck, North Dakota for approximately $4,464.  The purchase was financed with a combination of the issuance of limited partnership units valued at approximately $3,901, an assumed loan of $299 and cash.  The interest was acquired from an entity affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $783, and $874, respectively.

 

In June 2015, the operating partnership purchased 1.13 acres of development land in Mankato, MN adjacent to a commercial property owned by the operating partnership for approximately $263.  The purchase was financed with $263 of cash.

 

The following table summarizes the fair value of the assets acquired and liabilities assumed during the six months ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and

 

In Place

 

Favorable

 

Unfavorable

 

Mortgages

 

Consideration

 

    

Equipment

    

Leases

    

Lease Terms

    

Lease Terms

    

Assumed

    

Given

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Valley Homes Duplexes, Grand Forks, ND

 

$

2,148

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

2,148

Titan Machinery, Bismarck, ND

 

 

2,345

 

 

681

 

 

390

 

 

 —

 

 

 —

 

 

3,416

Quail Creek, Springfield, MO

 

 

10,900

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,900

Parkview Arms, Bismarck, ND

 

 

4,464

 

 

 —

 

 

 —

 

 

 —

 

 

(299)

 

 

4,165

Land, Mankato, MN

 

 

263

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

20,120

 

$

681

 

$

390

 

$

 —

 

$

(299)

 

$

20,892

 

Total consideration given for acquisitions through June 30, 2015 was completed through issuing approximately 395,000 limited partnership units of the operating partnership valued at $15.00 and $15.50 per unit for an aggregate consideration of approximately $6,049, new loans of $10,230, assumed loans of $299, assumed liabilities of $71 and cash of $4,542. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

 

31


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

Purchases during the six months ended June 30, 2014

 

In January 2014, the operating partnership purchased a 24 unit apartment complex in Grand Forks, North Dakota for approximately $1,320.  The purchase was financed with the issuance of limited partnership units valued at approximately $1,320. 

 

In January 2014, the operating partnership purchased a 64 unit apartment complex in Fargo, North Dakota for approximately $3,520.  The purchase was financed with the issuance of limited partnership units valued at approximately $1,848 and cash.  The interest was purchased from an entity affiliated with Mr. Wieland, a related party, who received limited partnership units valued at approximately $739. 

 

In January 2014, the operating partnership purchased a 30 unit apartment complex in Hutchinson, Minnesota for approximately $1,080.  The purchase was financed with the issuance of limited partnership units valued at $1,080.  The property was purchased from entities affiliated with Messrs. Regan, Wieland and Furness, related parties, who received limited partnership units valued at approximately $216, $216 and $108, respectively.

 

In January 2014, the operating partnership purchased a 24 unit apartment complex in Crookston, Minnesota for approximately $1,104.  The purchase was financed with the issuance of limited partnership units valued at $1,104.  The property was purchased from entities affiliated with Messrs. Regan, Wieland and Furness, related parties, who received limited partnership units valued at approximately $221, $221 and $110, respectively.

 

In May 2014, the operating partnership entered into an agreement to merge the Eagle Run Partnership, LLP into the partnership for approximately $1,566.  Following the transaction, Eagle Run Partnership, LLP ceased to exist.  The merger was financed with the issuance of limited partnership units valued at $690 and through assumption of mortgage debt of approximately $876.  The interest was acquired from an entity affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $221, and $110, respectively.

 

In June 2014, the operating partnership purchased a 128 unit apartment complex in Moorhead, Minnesota for approximately $4,848.  The purchase was financed with the combination of an assumed loan of $704, the issuance of limited partnership units valued at approximately $3,906 and cash. The interest was purchased from an entity affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $1,730 and $905, respectively. 

 

In June 2014, the operating partnership purchased a 142 unit apartment complex in West Fargo, North Dakota for approximately $6,840.  The purchase was financed with the combination of the issuance of limited partnership units valued at approximately $4,448 and cash. The interest was purchased from an entity affiliated with Mr. Wieland, a related party, who received limited partnership units valued at approximately $2,738. 

 

32


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

The following table summarizes the fair value of the assets acquired and liabilities assumed during the six months ended June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and

 

In Place

 

Favorable

 

Unfavorable

 

Mortgages

 

Consideration

 

    

Equipment

    

Leases

    

Lease Terms

    

Lease Terms

    

Assumed

    

Given

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Barrett Arms Apartments, Crookston, MN

 

$

1,104

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

1,104

Chandler 1802, Grand Forks, ND

 

 

1,320

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,320

Echo Manor Apartments, Hutchinson, MN

 

 

1,080

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,080

Westcourt Apartments, Fargo, ND

 

 

3,520

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,520

Eagle Run Apartments, West Fargo, ND (1)

 

 

1,566

 

 

 —

 

 

 —

 

 

 —

 

 

(876)

 

 

690

Griffin Court Apartments, Moorhead, MN

 

 

4,848

 

 

 —

 

 

 —

 

 

 —

 

 

(704)

 

 

4,144

Parkwest Gardens Apartments, West Fargo, ND

 

 

6,840

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

20,278

 

$

 —

 

$

 —

 

$

 —

 

$

(1,580)

 

$

18,698

 

(1)

Assumed loan presented as consideration given, however, previously consolidated the single asset LLP due to controlling financial interest.

 

 

   Total consideration given for acquisitions through June 30, 2014 was completed through issuing approximately 1,028,000 limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $14,396, assumed loans of $1,580, assumed liabilities and deferred maintenance of $167 and cash of $4,135. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

 

Estimated Value of Units/Shares

 

The Board of Trustees has determined an estimate of fair value for the trust shares issued in the first six months of 2015 and 2014.  In addition, the Board of Trustees, acting as general partner for the operating partnership, has determined an estimate of fair value for the limited partnership units issued in the first six months of 2015 and 2014.  In determining this value, the Board relied upon their experience with, and knowledge about, our real estate portfolio and debt obligations.  The Board also relied on valuation methodologies that are commonly used in the real estate industry.  The methodology used by our board to determine this value was based on the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain.

 

Based on the results of the methodologies, the Board determined the fair value of the shares and limited partnership units to be $14.00 per share/unit for the first three months of 2014 through March 27, 2014.  The Board determined the fair value of the shares and limited partnership units to be $15.00 per share/unit effective March 28, 2014. The Board determined the fair value of the shares and limited partnership units to be $15.50 per share/unit effective February 1, 2015.

 

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 fair 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 did not include a liquidity discount in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange; 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

33


 

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014 (UNAUDITED)

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

 

strategy, whether that strategy might be a listing of the limited partnership units or Sterling common shares on a national securities exchange or a merger or sale of our portfolio.

 

NOTE 20 - SUBSEQUENT EVENTS

 

On July 15, 2015, we paid a dividend or distribution of $0.2325 per share on our common shares of beneficial interest, to common shareholders and limited unit holders of record on June 30, 2015.

 

In July 2015, the operating partnership sold 3.38 acres of development land in Fargo, ND for approximately $1,425.

 

In July 2015, the operating partnership purchased 1.95 acres of development land in Fargo, ND adjacent to a commercial property owned by the operating partnership for approximately $500.  The purchase was financed with $500 of cash.

 

In July 2015, the Trust, through a subsidiary of the operating partnership, entered into a purchase agreement with an unaffiliated third party seller to acquire a 70% interest in a 14 story suburban office building containing 298,171 rentable square feet of office space located in Bloomington, Minnesota known as the Northland Plaza.  The proposed purchase price under the agreement is $52,500,000.  The Trust is presently seeking financing for approximately 68% of the total purchase price.  The purchase price is subject to numerous closing conditions and other terms and conditions customary for real estate transactions, including further due diligence review.  While the parties project a closing date of August 13, 2015, closing may occur after this date and there is no assurance at this time that closing will occur.

 

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.

 

 

 

 

 

34


 

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 other risks detailed in the Company’s other 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

 

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 33.19% of the operating partnership as of June 30, 2015.  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 his investment in order to pay taxes.

 

Operating Partnership

 

Our operating partnership, Sterling Properties, LLLP, was formed as a North Dakota limited liability limited partnership on April 25, 2003 to acquire, own and operate properties on our behalf. The operating partnership holds a diversified portfolio of commercial and multi-family properties located principally in the upper and central Midwest United States.

 

As of June 30, 2015, approximately 72.9% of our properties were apartment communities located primarily in North Dakota with others located in Minnesota, Missouri and Nebraska.  Most multi-family properties are leased to a variety of tenants under short‑term leases. 

 

As of June 30, 2015, approximately 27.1% of our properties were comprised of office, retail, industrial and medical commercial property located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Texas and Wisconsin.  We have both single and multi-tenant properties in the commercial portfolio, most of which are under long-term leases.

 

35


 

Our real estate portfolio consisted of 141 properties containing 8,393 apartments  and approximately 1,392,000 square feet of leasable commercial space as of June 30, 2015.  The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of approximately $549,071, which includes construction in progress.

 

Our Board of Trustees and Executive Officers

 

We operate under the direction of our Board of Trustees, the members of which are accountable to our shareholders as fiduciaries. In addition, the Board has a duty to supervise our relationship with the Advisor, and evaluate the performance of and fees paid to the Advisor on an annual basis prior to renewing the Advisory Agreement with the Advisor. 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 of our Advisor. Our trustees are elected annually by our shareholders. Although we have executive officers, we do not have any paid employees.

 

Our Advisor

 

Our external Advisor is Sterling Management, LLC, a North Dakota limited liability company formed on November 14, 2002. Our Advisor, with offices in Fargo, North Dakota, is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf.

 

Critical Accounting Estimates

 

Preparation of our financial statements requires estimates and judgments to be made that affect 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 six months ended June 30, 2015 included elsewhere in this report.

 

Specific Achievements

 

·

Increased revenues from rental operations by $12,031 or 35.0% for the six months ended June 30, 2015, compared to same six month period in 2014.

·

Acquired three  (3) properties totaling 250 residential apartment units,  one property totaling 22,000 square feet of commercial space and one (1) parcel of land for a total of $21,191 during the six months ended June 30, 2015.

·

Declared and paid dividends totaling $0.4650 per common share for first and second quarters of 2015.

 

36


 

Results of Operations for the Three Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended  June 30, 2015

    

Three months ended  June 30, 2014

 

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

 

 

(unaudited)

 

(unaudited)

 

    

(in thousands)

 

(in thousands)

Real Estate Revenues

       

$

18,901

  

$

4,651

  

$

23,552

  

$

12,909

  

$

4,353

 

$

17,262

Real Estate Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Taxes

 

 

1,366

 

 

242

 

 

1,608

 

 

1,028

 

 

234

 

 

1,262

Property Management Fees

 

 

2,264

 

 

72

 

 

2,336

 

 

1,537

 

 

73

 

 

1,610

Utilities

 

 

1,554

 

 

197

 

 

1,751

 

 

1,201

 

 

209

 

 

1,410

Repairs and Maintenance

 

 

3,463

 

 

264

 

 

3,727

 

 

2,493

 

 

181

 

 

2,674

Insurance

 

 

529

 

 

13

 

 

542

 

 

388

 

 

14

 

 

402

Total Real Estate Expenses

 

 

9,176

 

 

788

 

 

9,964

 

 

6,647

 

 

711

 

 

7,358

Net Operating Income

 

$

9,725

 

$

3,863

 

 

13,588

 

$

6,262

 

$

3,642

 

 

9,904

Interest

 

 

 

 

 

 

 

 

3,898

 

 

 

 

 

 

 

 

3,082

Depreciation and amortization

 

 

 

 

 

 

 

 

4,349

 

 

 

 

 

 

 

 

3,377

Administration of REIT

 

 

 

 

 

 

 

 

1,054

 

 

 

 

 

 

 

 

1,310

Other (income)/expense

 

 

 

 

 

 

 

 

(309)

 

 

 

 

 

 

 

 

(659)

Net Income

 

 

 

 

 

 

 

$

4,596

 

 

 

 

 

 

 

$

2,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributed to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

 

 

 

$

3,085

 

 

 

 

 

 

 

$

2,017

Sterling Real Estate Trust

 

 

 

 

 

 

 

$

1,511

 

 

 

 

 

 

 

$

777

Dividends per share (1)

 

 

 

 

 

 

 

$

0.2325

 

 

 

 

 

 

 

$

0.2250

Earnings per share

 

 

 

 

 

 

 

$

0.20

 

 

 

 

 

 

 

$

0.14

Weighted average number of common shares

 

 

 

 

 

 

 

 

7,436

 

 

 

 

 

 

 

 

5,443

 

 


(1)

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

 

Revenues

 

Property revenues of approximately $23,552 for the three months ended June 30, 2015 increased approximately $6,290 or 36.4% in comparison to the same period in 2014.  Residential property revenues increased approximately $5,992 and commercial property revenues increased approximately $298.

 

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

 

 

 

 

 

 

 

 

 

 

    

June 30,

 

June 30,

 

    

2015

    

2014

Residential occupancy

 

96.1

%

 

97.1

%

Commercial occupancy

 

97.1

%

 

98.8

%

 

Residential revenues for the three months ended June 30, 2015 increased $5,992 in comparison to the same period for 2014.  Approximately $5,457 of the increase was due to residential properties acquired since January 1,  2014.  Rental income from residential properties owned for more than one year increased approximately $535 in comparison to the same period in 2014.  Residential revenues comprised 80.3% of total revenues for the three months ended June 30, 2015 compared to 74.8% of total revenues for the three months ended June 30, 2014.  The residential occupancy rates for the three months ended June 30, 2015 decreased 1.0% primarily due to the number of new apartments available in the Midwest market in recent months and the onboarding of the first, second, third and fourth buildings placed in service of the Bismarck, North Dakota development project.  The development project is a four building 156 unit multi-family apartment community. Building one, two, three and four were placed in service August 2014, October 2014, February 2015, and June 2015 respectively.    

 

37


 

For the three months ended June 30, 2015 total commercial revenues increased $298 in comparison to the same period for 2014. Approximately $88 of the increase was due to commercial properties acquired since January 1, 2014.  Rental income from commercial properties owned for more than one year increased approximately $210 in comparison to the same period in 2014 primarily due to increased CAM income from two properties and settlement proceeds from a triple net tenant for repair and replacement of structural components at a retail property in Minnesota.  Commercial revenues comprised 19.7% of the total revenues for the three months ended June 30, 2015 compared to 25.2% of total revenues for the three months ended June 30, 2014.  The commercial occupancy rates for the three months ended June 30, 2015 decreased 1.7% primarily due to tenant turnover at an office property in Duluth, Minnesota.

 

Expenses

 

Residential expenses from operations of $9,176 during the three months ended June 30, 2015 increased $2,529 or 38.0% in comparison to the same period in 2014. This increase was primarily attributed to the increase in number of residential properties owned during the three months ended June 30, 2015 versus the same period in 2014.      In addition, increased repair and maintenance expenses reflect the investments made to position these properties for continued rate increases, tenant retention, and market competitiveness. 

 

Commercial expenses from operations of $788 during the three months ended June 30, 2015 increased $77 or 10.8% in comparison to the same period in 2014.  The increase was primarily attributed to increases in repairs and maintenance expenses to repair a heating system at an office property in Bismarck, North Dakota and to repair an elevator at an office property in Duluth, Minnesota.

 

Interest expense of $3,898 during the three months ended June 30, 2015 increased $816 in comparison to the same period in 2014. Interest expense was approximately 16.6% and  17.9% of rental income for the three months ended June 30, 2015 and 2014 respectively. 

 

Depreciation and amortization expense increased 28.8% from $3,377 for the three months ended June 30, 2014 to approximately $4,349 for the three months ended June 30, 2015. The $972 increase was primarily a result of depreciation and amortization for the 13 properties added to our portfolio since June 30, 2014. Depreciation and amortization expense as a percentage of rental income for the three months ended June 30, 2015 and 2014 was relatively consistent at 18.5% and 19.6%, respectively.

 

REIT administration expenses decreased from $1,310 for the three months ended June 30, 2014 to $1,054 for the three months ended June 30, 2015 due to a decrease in acquisition expenses related to lower acquisition activity in 2015 comparison to the same period in 2014. 

 

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.

 

Residential NOI increased $3,463 or 55.3% for the three months ended June 30, 2015 in comparison to the same three month period in 2014 due primarily to acquisition activity in the residential segment. Commercial NOI increased $221 or 6.1% for the three months ended June 30, 2015 in comparison to the same three month period in 2014 due primarily to increased  CAM income from two properties and settlement proceeds from a triple net tenant for repair and replacement of structural components at a retail property in Minnesota. 

 

38


 

Net Income

 

Net income for the three months ended June 30, 2015 was $4,596 compared to $2,794 for the three months ended June 30, 2014

 

Results of Operations for the Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2015

    

Six months ended June 30, 2014

 

    

Residential

    

Commercial

    

Total

    

Residential

    

Commercial

    

Total

 

 

(unaudited)

 

(unaudited)

 

 

(in thousands)

 

(in thousands)

Real Estate Revenues

    

$

37,320

    

$

9,057

    

$

46,377

    

$

25,525

    

$

8,821

    

$

34,346

Real Estate Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Taxes

 

 

3,036

 

 

478

 

 

3,514

 

 

2,085

 

 

492

 

 

2,577

Property Management Fees

 

 

4,531

 

 

142

 

 

4,673

 

 

3,019

 

 

149

 

 

3,168

Utilities

 

 

3,427

 

 

418

 

 

3,845

 

 

2,670

 

 

447

 

 

3,117

Repairs and Maintenance

 

 

6,473

 

 

549

 

 

7,022

 

 

4,616

 

 

409

 

 

5,025

Insurance

 

 

1,112

 

 

26

 

 

1,138

 

 

772

 

 

28

 

 

800

Total Real Estate Expenses

 

 

18,579

 

 

1,613

 

 

20,192

 

 

13,162

 

 

1,525

 

 

14,687

Net Operating Income

 

$

18,741

 

$

7,444

 

 

26,185

 

$

12,363

 

$

7,296

 

 

19,659

Interest

 

 

 

 

 

 

 

 

7,851

 

 

 

 

 

 

 

 

6,146

Depreciation and amortization

 

 

 

 

 

 

 

 

8,599

 

 

 

 

 

 

 

 

6,732

Administration of REIT

 

 

 

 

 

 

 

 

2,490

 

 

 

 

 

 

 

 

2,354

Other (income)/expense

 

 

 

 

 

 

 

 

(528)

 

 

 

 

 

 

 

 

(1,232)

Net Income

 

 

 

 

 

 

 

$

7,773

 

 

 

 

 

 

 

$

5,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributed to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest

 

 

 

 

 

 

 

$

5,312

 

 

 

 

 

 

 

$

4,085

Sterling Real Estate Trust

 

 

 

 

 

 

 

$

2,461

 

 

 

 

 

 

 

$

1,574

Dividends per share (1)

 

 

 

 

 

 

 

$

0.4650

 

 

 

 

 

 

 

$

0.4500

Earnings per share

 

 

 

 

 

 

 

$

0.36

 

 

 

 

 

 

 

$

0.29

Weighted average number of common shares

 

 

 

 

 

 

 

 

6,875

 

 

 

 

 

 

 

 

5,441

(1)

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

 

Revenues

 

Property revenues of approximately $46,377 for the six months ended June 30, 2015 increased approximately $12,031 or 35.0% in comparison to the same period in 2014. Residential property revenues increased approximately $11,795 while commercial property revenues increased approximately $236.

 

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

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

June 30,

 

    

2015

    

2014

Residential occupancy

 

95.9

%

 

97.1

%

Commercial occupancy

 

97.4

%

 

99.1

%

 

Residential revenues for the six months ended June 30, 2015 increased $11,795 in comparison to the same period for 2014.  Approximately $10,829 of the increase was due to residential properties acquired since January 1, 2014.  Rental income from residential properties owned for more than one year increased approximately $966 in comparison to the same period in 2014.  Residential revenues comprised 80.5% of total revenues for the six months ended June 30, 2015 compared to 74.3% of total revenues for the six months ended June 30, 2014.  The residential occupancy rates for the six months ended June 30, 2015 decreased 1.2% primarily due to the number of new apartments available in the Midwest market in recent months and the onboarding of the first, second, third and fourth buildings placed in service of the Bismarck, North

39


 

Dakota development project.  The development project is a four building 156 unit multi-family apartment community. Building one, two, three and four were placed in service August 2014, October 2014, February 2015, and June 2015, respectively. 

 

For the six months ended June 30, 2015 total commercial revenues increased $236 in comparison to the same period for 2014.  Approximately $150 of the increase was due to commercial properties acquired since January 1, 2014.  Rental income from commercial properties owned for more than one year increased approximately $86 in comparison to the same period in 2014 primarily due to increased CAM income from two properties and settlement proceeds from a triple net tenant for repair and replacement of structural components at a retail property in Minnesota. Commercial revenues comprised 19.5% of the total revenues for the six months ended June 30, 2015 compared to 25.7% of total revenues for the six months ended June 30, 2014. The commercial occupancy rates for the six months ended June 30, 2015 decreased 1.7% primarily due to tenant turnover at an office property in Duluth, Minnesota.

 

Expenses

 

Residential expenses from operations of $18,579 during the six months ended June 30, 2015 increased $5,417 or 41.2% in comparison to the same period in 2014. This increase was primarily attributed to the increase in number of residential properties owned during the six months ended June 30, 2015 versus the same period in 2014.   In addition, increased repair and maintenance expenses reflect the investments made to position these properties for continued rate increases, tenant retention, and market competitiveness.

 

Commercial expenses from operations of $1,613 during the six months ended June 30, 2015 increased $88 or 5.8% in comparison to the same period in 2014.  The increase was primarily attributed to increases in repairs and maintenance expenses to replace flooring in three properties.

 

Interest expense of $7,851 during the six months ended June 30, 2015 increased $1,705 in comparison to the same period in 2014. Interest expense was approximately 16.9% and 17.9% of rental income for the six months ended June 30, 2015 and 2014, respectively.

 

Depreciation and amortization expense increased 27.7% from $6,732 for the six months ended June 30, 2014 to approximately $8,599 for the six months ended June 30, 2015. The $1,867 increase was primarily a result of depreciation and amortization for the 13 properties added to our portfolio since June 30, 2014. Depreciation and amortization expense as a percentage of rental income for the six months ended June 30, 2015 and 2014 was relatively consistent at 18.5% and 19.6%, respectively.

 

REIT administration expenses increased from $2,354 for the six months ended June 30, 2014 to $2,490 for the six months ended June 30, 2015 due to an increase in acquisition expenses related to acquisition activity in comparison to the same period in 2014.  

 

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.

 

Residential NOI increased $6,378 or 51.6% for the six months ended June 30, 2015 in comparison to the same six month period in 2014 due primarily to acquisition activity in the residential segment. Commercial NOI increased $148 or 2.0% for the six months ended June 30, 2015 in comparison to the same six month period in 2014 due primarily to increased CAM income from two properties and settlement proceeds from a triple net tenant for repair and replacement of structural components at a retail property in Minnesota. 

40


 

 

Net Income

 

Net income for the six months ended June 30, 2015 was $7,773 compared to $5,659 for the six months ended June 30, 2014

 

Property Acquisitions and Dispositions

 

Property Acquisitions and Dispositions during the six months ended June 30, 2015

 

We acquired four properties and one parcel of land for a total of $21,191 during the six months ended June 30, 2015. Total consideration for the acquisitions was the issuance of approximately $6,049 in limited partnership units of the operating partnership,  new loans of $10,230, assumed loans of $299, assumed liabilities of $71 and cash of $4,542.  

 

During the six months ended June 30, 2015, there were no dispositions.

 

Property Acquisitions and Dispositions during the six months ended June 30, 2014

 

We acquired seven properties for a total of $20,278 during the six months ended June 30, 2014. Total consideration for the acquisitions was the issuance of approximately $14,396 in limited partnership units of the operating partnership, assumed loans of $1,580, assumed liabilities and deferred maintenance of $167 and cash of $4,135. 

 

During the six months ended June 30, 2014, there were no dispositions.

 

See Notes 18 and 19 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the six months ended June 30, 2015 and 2014.

 

Funds From Operations and Modified Funds From Operations (FFO and MFFO)

 

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

 

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

 

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

 

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

 

41


 

In addition to FFO, management also uses Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental performance measure. MFFO as defined by us excludes from FFO acquisition related costs which are required to be expensed in accordance with GAAP. Our definition of MFFO also excludes disposition costs related to sales of investment properties. Acquisition and disposition related expenses include those paid to our Advisor and third parties. Management believes that excluding acquisition and disposition related costs from MFFO provides useful supplemental performance information that is comparable over the long-term and that is consistent with management’s analysis of the operating performance of the REIT.

 

While FFO and MFFO 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 and MFFO or calculate FFO and MFFO in the same way. The FFO and MFFO reconciliation presented here is not necessarily comparable to FFO and MFFO presented by other real estate investment trusts. FFO and MFFO 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 and MFFO 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 MFFO, and the reconciliations to net income, for the three and six months ended June 30, 2015 and 2014, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30, 2015

 

Three months ended  June 30, 2014

 

 

 

 

 

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

 

$

1,511

 

7,436

 

$

0.20

 

$

777

 

5,443

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest - OPU

 

 

3,085

 

14,911

 

 

 

 

 

2,015

 

14,091

 

 

 

Depreciation & Amortization from continuing operations

 

 

4,349

 

 

 

 

 

 

 

3,377

 

 

 

 

 

Pro rata share of unconsolidated affiliate depreciation & amortization

 

 

120

 

 

 

 

 

 

 

122

 

 

 

 

 

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

 

 

9,065

 

22,347

 

$

0.41

 

 

6,291

 

19,534

 

$

0.32

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition, and disposition expenses

 

 

280

 

 

 

 

 

 

 

689

 

 

 

 

 

Modified Funds from Operations applicable to common shares and limited partnership units (MFFO)

 

$

9,345

 

22,347

 

$

0.42

 

$

6,980

 

19,534

 

$

0.36

(1)

Please see Note 11 and Note 13 to the consolidated financial statements included above for more information.

(2)

Net Income is calculated on a per share basis.  FFO and MFFO are calculated on a per share and unit basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42


 

 

 

Six months ended June 30, 2015

 

 

Six months ended June 30, 2014

 

 

 

 

 

Weighted Avg

 

Per

 

 

 

 

Weighted Avg

 

Per

 

 

 

 

 

Shares and

 

Share and

 

 

 

 

Shares and

 

Share and

 

    

Amount

    

Units(1)

    

Unit (2)

    

Amount

    

Units(1)

    

Unit (2)

 

 

(unaudited)

 

 

(in thousands, except per share data)

Net Income attributable to Sterling Real Estate Trust

 

$

2,461

 

6,875

 

$

0.36

 

$

1,574

 

5,441

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interest - OPU

 

 

5,312

 

14,837

 

 

 

 

 

4,076

 

13,997

 

 

 

Depreciation & Amortization from continuing operations

 

 

8,599

 

 

 

 

 

 

 

6,732

 

 

 

 

 

Pro rata share of unconsolidated affiliate depreciation & amortization

 

 

241

 

 

 

 

 

 

 

243

 

 

 

 

 

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

 

 

16,613

 

21,712

 

$

0.77

 

 

12,625

 

19,438

 

$

0.65

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition, and disposition expenses

 

 

810

 

 

 

 

 

 

 

1,050

 

 

 

 

 

Modified Funds from Operations applicable to common shares and limited partnership units (MFFO)

 

$

17,423

 

21,712

 

$

0.80

 

$

13,675

 

19,438

 

$

0.70

(1)

Please see Note 11 and Note 13 to the consolidated financial statements included above for more information.

(2)

Net Income is calculated on a per share basis.  FFO and MFFO are calculated on a per share and unit basis.

 

 

 

 

Liquidity and Capital Resources

 

Our principal demands for funds will be for the (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends/distributions (iv) payment of principal and interest on current and any future outstanding indebtedness, and (v) redemptions of our securities under our redemption plans. 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.

 

Historically, the geographic location of our properties and credit-worthiness of our tenants have resulted in minimal to no property impairments or write-offs on uncollectible rental revenues. We currently anticipate the trend to continue. It is possible, however, that tenants may file for bankruptcy or default on their leases in the future and that economic conditions may deteriorate.

 

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

43


 

a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.

 

Lease Expirations and Occupancy

 

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

 

Cash Flow Analysis

 

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

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2015

    

2014

 

 

(in thousands)

Net cash flows provided by operating activities

 

$

12,809

 

$

4,507

Net cash flows used in investing activities

 

$

(5,668)

 

$

(8,168)

Net cash flows used in financing activities

 

$

(1,411)

 

$

(9,403)

 

Operating Activities

 

Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct leases costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance costs, 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 $12,809 and $4,507 for the six months ended June 30, 2015 and 2014,  respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. The funds generated for the six months ended June 30, 2015 and 2014 were primarily from property operations of our real estate portfolio.  In addition, during the six months ended June 30, 2014, we invested $7,152 in marketable securities consisting of real estate backed equity securities.

 

Investing Activities

 

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

 

Net cash used in investing activities was $5,668 and $8,168 for the six months ended June 30, 2015 and 2014, respectively (this does not include the value of UPREIT units issued in connection with investing activities).  For the six months ended June 30, 2015 and 2014, cash flows used in investing activities related primarily to the acquisition of properties and capital expenditures was $7,049 and $7,840, respectively, and the decrease in restricted cash for replacement reserve escrows was $1,222 and $13, respectively.    In addition, during the six months ended June 30, 2014, we invested $647 in unconsolidated affiliates primarily used to acquire an office building site in Duluth, Minnesota.

 

44


 

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  $1,411 and $9,403 for the six months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2015,  we paid approximately $7,669 in dividends and distributions, redeemed  $1,098 of shares and units, received proceeds from new mortgage notes payable of approximately $9,636,  made mortgage principal payments of approximately $10,295, made net payments of $16,419 on short-term notes, and received proceeds from issuance of commons shares of $25,750.  For the six months ended June 30, 2014,  we paid approximately $6,773 in dividends and distributions, redeemed  $3,812 of shares and units, received proceeds from new mortgage notes payable of approximately $2,863 made mortgage principal payments of approximately $3,835, and received net proceeds of $1,422 on short-term notes.

 

Dividends

 

Common Stock

 

We declared cash dividends to our shareholders during the period from January 1, 2015 to June 30, 2015 totaling $3,371 or $0.4650 per share, including amounts reinvested through the dividend reinvestment plan.  During the six months ended June 30, 2015, we paid cash dividends of $1,185 and dividends of $2,186 were reinvested under the dividend reinvestment plan.  The cash dividends were paid with the $12,808 from our cash flows from operations and  $184 provided by distributions from unconsolidated affiliates.

 

We declared cash dividends to our shareholders during the period from January 1, 2014 to June 30, 2014 totaling $2,436 or $0.4500 per share, including amounts reinvested through the dividend reinvestment plan.  During the six months ended June 30, 2014, we paid cash dividends of $795 and dividends of $1,641 were reinvested under the dividend reinvestment plan.  The cash dividends were paid with the $4,507 from our cash flows from operations and $139 provided by distributions from unconsolidated affiliates.

 

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

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2015

    

2014

 

 

(in thousands)

Cash flows provided by operations  (includes net income of $7,773 and $5,659, respectively)

 

$

12,809

 

$

4,507

Distributions from unconsolidated affiliates

 

 

184

 

 

139

Dividends declared

 

 

(3,371)

 

 

(2,436)

Excess (Deficit)

 

$

9,622

 

$

2,210

 

 

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.

45


 

 

For the six months ended June 30, 2015, we declared and paid distributions of $6,916 to holders of limited partnership units in our operating partnership. Distributions were paid at a rate of $0.4650 per unit, which is equal to the per share distribution rate paid to the common shareholders. As of June 30, 2015, the limited partnership declared distributions of $3,484 which represented distributions for the quarter ended June 30, 2015, and we paid such amount on July 15, 2015.  

 

For the six months ended June 30, 2014, we declared and paid distributions of $6,387 to holders of limited partnership units in our operating partnership. Distributions were paid at a rate of $0.4500 per unit, which is equal to the per share distribution rate paid to the common shareholders. As of June 30, 2014, the limited partnership declared distributions of $3,263 which represented distributions for the quarter ended June 30, 2014, and we paid such amount on July 15, 2014. 

 

Sources of Dividends

 

For the six months ended June 30, 2015, we paid aggregate dividends of $3,371, which were paid 100% from cash flows provided by operating activities. Our funds from operations, or FFO, was $16,613 while our modified funds from operations, or MFFO, for the six months ended June 30, 2015 was $17,423; therefore our management believes our distribution policy is sustainable over time. For the six months ended June 30, 2014, we paid aggregate dividends of $2,436 which were paid 100% from cash flows provided by operating activities. Our FFO was $12,625 while our MFFO, as of the six months ended June 30, 2014 was $13,675. For a further discussion of FFO and MFFO, including a reconciliation of FFO and MFFO to net income, see “Funds from Operations and Modified Funds from Operations” above. 

 

Cash Resources

 

At June 30, 2015, our cash resources consisted of cash and cash equivalents totaling approximately $6,373. In addition, we had unencumbered properties with a gross book value of $34,311, which could potentially be used as collateral to secure additional financing in future periods.  

 

We have a $19,300 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2018; a $3,000 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires November 2019;  and a  $3,315 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires November 2019. The lines of credit are secured by properties in Duluth, Minnesota; Minneapolis/St. Paul, Minnesota; Austin, Texas; Mandan, North Dakota; Fargo, North Dakota; St. Cloud, Minnesota; Moorhead, Minnesota; and Grand Forks, North Dakota. We also have a $2,000 variable rate (prime rate less 0.5%) unsecured line of credit agreement with Bremer Bank, which expires October 2015; and a $3,000 variable rate (prime rate) unsecured line of credit agreement with Bell State Bank & Trust, which expires December 2015.   At June 30, 2015, there was no balance outstanding on the lines of credit, leaving $29,315 available and unused under the agreements. 

 

Certain line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios.  As a result of the December 19, 2014 suburban Minneapolis, Minnesota portfolio acquisition the Company was out of compliance with Bremer’s post distribution debt service coverage ratio requirement on a consolidated basis on the secured line of credit as of December 31, 2014. A waiver was received from the lender.  As of June 30, 2015, we were in compliance with all covenants.

 

Our cash resources can be used for working capital needs and other commitments.  

 

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 six months ended June 30, 2015, we issued 1,677,000 common shares in a private placement to accredited investors pursuant to Regulations D and Rule 506 and raised gross proceeds of $25,750.  During the six months ended June 30, 2015, we issued 135,000 and 55,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively and raised gross proceeds of $2,796.  During the six months ended June 30, 2014, we did not sell any common shares in private placements. During the six months ended June 30, 2014, we

46


 

issued 114,000 and 56,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively and raised gross proceeds of $2,379.

 

During the six months ended June 30, 2015, we issued limited partnership units valued at approximately $6,049 in connection with the acquisition of four properties.

 

During the six months ended June 30, 2014, we issued limited partnership units valued at approximately $14,396 in connection with the acquisitions of seven properties. 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2015 and December 31, 2014, 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.

 

Item 4. Controls and Procedures.  

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Accounting 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 Accounting Officer have concluded that, as of June 30, 2015, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the second fiscal quarter of 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

47


 

PART II

OTHER INFORMATION

 

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

 

Sale of Securities 

 

During the three months ended June 30, 2015,  we sold common shares to accredited investors in a private placement pursuant to Section 4(2) and Rule 506 of Regulation  D.  The purchase price of the shares was (1) $14.725 for insiders (our trustees and officers; governors, officers and employees of our Advisor; their affiliates; and immediate family members) or (2) $15.50 per share.  During the three months ended June 30, 2015, under the private placement we issued the following number of common shares and raised gross proceeds as set forth in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number

 

 

 

 

 

 

 

 

of Common

 

 

Gross

 

 

 

Period

    

Shares Sold

 

    

Proceeds

    

 

 

April 1-30, 2015

 

264,854

 

$

4,103,367

 

 

 

May 1-31, 2015

 

34,670

 

$

537,385

 

 

 

June 1-30, 2015

 

 -

 

$

 -

 

 

 

Total

 

299,524

 

$

4,640,752

 

 

 

 

In connection with the completion of the acquisition of certain contributed properties, the operating partnership issued units as a portion of the purchase price, at a price per unit, as applicable, of $15.50, as set forth in the table below, during the three months ended June 30, 2015 (in thousands, except per unit data) pursuant to Section 4(2) and Rule 506 of Regulation D.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

 

 

 

 

 

 

 

Acquisition

 

 

Number of

 

Aggregate

Property

    

Date

 

    

Units

    

Consideration

Parkview Arms Apartments, Bismarck, ND

 

05/13/15

 

 

251,681

 

 

$ 3,901

 

 

Other Sales

 

During the three months ended June 30, 2015, 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(2) and Rule 506 of Regulation D.

 

 

 

 

Redemptions of Securities 

 

Set forth below is information regarding common shares and limited partnership units redeemed during the three months ended June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

April 1-30, 2015

 

3,000

 

 

14,000

 

$

14.50

 

869,000

 

537,000

 

$

11,452,000

May 1-31, 2015

 

 —

 

 

1,000

 

$

14.50

 

869,000

 

538,000

 

$

11,429,000

June 1-30, 2015

 

4,000

 

 

10,000

 

$

14.50

 

874,000

 

548,000

 

$

11,223,000

Total

 

7,000

 

 

25,000

 

 

 

 

 

 

 

 

 

 

 

 

48


 

For the three months ended June 30, 2015, we redeemed all shares or units for which we received redemption requests.  In addition, for the three months ended June 30, 2015, all common shares and units redeemed were redeemed as part of the publicly announced plans.

 

On September 26, 2014, March 27, 2014 and February 1, 2015 our Board of Trustees revised the Share Repurchase Plan. The amended and restated Share Repurchase 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 $30,000 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 repurchase price for such shares and units repurchased under the plan was fixed at $14.00 per share or unit, which was increased to $14.50 effective February 1, 2015 and is the current repurchase price.  The repurchase 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 repurchase plan at any time if it determines to do so is in our best interest.

 

49


 

Item 6.  Exhibits.

 

Exhibit

 

 

Number

 

Title of Document

 

 

 

31.1

 

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

 

 

 

31.2

 

Certification of the Chief Accounting 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 Accounting 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 June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and six months ended June 30, 2015 and 2014; (iii) Consolidated Statement of Shareholders’ Equity for six months ended June 30, 2015; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, and; (v) Notes to Consolidated Financial Statements.

 

50


 

 

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:August 13, 2015

 

 

STERLING REAL ESTATE TRUST

 

 

 

 

By:

/s/ Kenneth P. Regan

 

 

Kenneth P. Regan

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ Angie D. Stock

 

 

Angie D. Stock

 

 

Chief Accounting Officer

 

 

(Principal Financial and Accounting Officer)

 

51