SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2014
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)
INREIT Real Estate Investment Trust
(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 November 7, 2014 |
Common Shares of Beneficial Interest, |
|
5,632,885.0578 |
STERLING REAL ESTATE TRUST
PART I – FINANCIAL INFORMATION
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
as of September 30, 2014 (UNAUDITED) and December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
2014 |
|
2013 |
||
|
|
(unaudited) |
|
|
|
|
|
|
(in thousands) |
||||
ASSETS |
|
|
|
|
|
|
Real estate investments |
|
$ |
422,113 |
|
$ |
403,192 |
Cash and cash equivalents |
|
|
9,634 |
|
|
13,849 |
Restricted deposits and funded reserves |
|
|
6,426 |
|
|
5,585 |
Investment in unconsolidated affiliates |
|
|
9,032 |
|
|
7,366 |
Due from related party |
|
|
5 |
|
|
64 |
Receivables |
|
|
2,914 |
|
|
3,517 |
Prepaid expenses |
|
|
219 |
|
|
1,209 |
Notes receivable |
|
|
600 |
|
|
— |
Investment in marketable securities |
|
|
7,682 |
|
|
— |
Financing and lease costs, less accumulated amortization of $2,709 in 2014 and $2,240 in 2013 |
|
|
2,750 |
|
|
2,950 |
Intangible assets, less accumulated amortization of $4,567 in 2014 and $3,720 in 2013 |
|
|
9,521 |
|
|
10,479 |
Other assets |
|
|
107 |
|
|
89 |
|
|
|
|
|
|
|
Total Assets |
|
$ |
471,003 |
|
$ |
448,300 |
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
247,786 |
|
$ |
239,008 |
Special assessments payable |
|
|
940 |
|
|
784 |
Dividends payable |
|
|
4,525 |
|
|
3,990 |
Due to related party |
|
|
184 |
|
|
294 |
Tenant security deposits payable |
|
|
2,540 |
|
|
2,305 |
Investment certificates |
|
|
367 |
|
|
364 |
Unfavorable leases, less accumulated amortization of $536 in 2014 and $432 in 2013 |
|
|
842 |
|
|
953 |
Accounts payable - trade |
|
|
1,005 |
|
|
403 |
Retainage payable |
|
|
427 |
|
|
133 |
Fair value of interest rate swaps |
|
|
268 |
|
|
309 |
Deferred insurance proceeds |
|
|
120 |
|
|
— |
Accrued expenses and other liabilities |
|
|
4,765 |
|
|
2,551 |
Total Liabilities |
|
|
263,769 |
|
|
251,094 |
|
|
|
|
|
|
|
COMMITMENTS and CONTINGENCIES - Note 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
Noncontrolling interest in operating partnership |
|
|
152,311 |
|
|
141,539 |
Beneficial interest |
|
|
55,191 |
|
|
55,976 |
Accumulated comprehensive loss |
|
|
(268) |
|
|
(309) |
Total Shareholders' Equity |
|
|
207,234 |
|
|
197,206 |
|
|
|
|
|
|
|
|
|
$ |
471,003 |
|
$ |
448,300 |
See Notes to Consolidated Financial Statements
3
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED September 30, 2014 AND 2013 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|||||||
|
|
September 30, |
|
|
September 30, |
|||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
||||
|
|
(in thousands) |
|
(in thousands) |
||||||||
Income from rental operations |
|
|
|
|
||||||||
Real estate rental income |
|
$ |
17,210 |
|
$ |
14,540 |
|
$ |
50,468 |
|
$ |
42,219 |
Tenant reimbursements |
|
|
541 |
|
|
948 |
|
|
1,629 |
|
|
2,801 |
|
|
|
17,751 |
|
|
15,488 |
|
|
52,097 |
|
|
45,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses from rental operations |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
3,051 |
|
|
2,683 |
|
|
9,197 |
|
|
8,036 |
Depreciation and amortization |
|
|
3,485 |
|
|
3,047 |
|
|
10,216 |
|
|
8,848 |
Real estate taxes |
|
|
1,304 |
|
|
1,697 |
|
|
3,880 |
|
|
4,921 |
Property management fees |
|
|
1,705 |
|
|
1,342 |
|
|
4,873 |
|
|
3,776 |
Utilities |
|
|
1,168 |
|
|
967 |
|
|
4,285 |
|
|
3,239 |
Repairs and maintenance |
|
|
3,363 |
|
|
1,788 |
|
|
8,388 |
|
|
4,688 |
Insurance |
|
|
419 |
|
|
359 |
|
|
1,219 |
|
|
858 |
Loss on impairment of property |
|
|
— |
|
|
226 |
|
|
— |
|
|
226 |
|
|
|
14,495 |
|
|
12,109 |
|
|
42,058 |
|
|
34,592 |
Administration of REIT |
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses |
|
|
60 |
|
|
40 |
|
|
224 |
|
|
183 |
Advisory fees |
|
|
465 |
|
|
367 |
|
|
1,356 |
|
|
1,068 |
Acquisition and disposition expenses |
|
|
194 |
|
|
620 |
|
|
1,244 |
|
|
2,182 |
Development fee |
|
|
166 |
|
|
— |
|
|
166 |
|
|
— |
Trustee fees |
|
|
11 |
|
|
15 |
|
|
35 |
|
|
38 |
Legal and accounting |
|
|
81 |
|
|
115 |
|
|
306 |
|
|
455 |
|
|
|
977 |
|
|
1,157 |
|
|
3,331 |
|
|
3,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
15,472 |
|
|
13,266 |
|
|
45,389 |
|
|
38,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
2,279 |
|
$ |
2,222 |
|
$ |
6,708 |
|
$ |
6,502 |
See Notes to Consolidated Financial Statements
4
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED September 30, 2014 AND 2013 (UNAUDITED)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
||||
|
|
(in thousands, except per share data) |
|
(in thousands, except per share data) |
||||||||
Income from operations |
|
$ |
2,279 |
|
$ |
2,222 |
|
$ |
6,708 |
|
$ |
6,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of unconsolidated affiliates |
|
|
310 |
|
|
243 |
|
|
785 |
|
|
604 |
Dividend and interest income |
|
|
133 |
|
|
7 |
|
|
291 |
|
|
21 |
Gain on disposal of real estate investments |
|
|
69 |
|
|
— |
|
|
69 |
|
|
— |
Gain on involuntary conversion |
|
|
— |
|
|
17 |
|
|
24 |
|
|
17 |
Gain (loss) on marketable securities |
|
|
(112) |
|
|
— |
|
|
463 |
|
|
— |
|
|
|
400 |
|
|
267 |
|
|
1,632 |
|
|
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,679 |
|
|
2,489 |
|
|
8,340 |
|
|
7,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
— |
|
|
265 |
|
|
— |
|
|
797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,679 |
|
$ |
2,754 |
|
$ |
8,340 |
|
$ |
7,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest |
|
|
1,944 |
|
|
1,917 |
|
|
6,028 |
|
|
5,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Sterling |
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Trust |
|
$ |
735 |
|
$ |
837 |
|
$ |
2,312 |
|
$ |
2,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Continued operations |
|
$ |
0.13 |
|
$ |
0.14 |
|
$ |
0.42 |
|
$ |
0.41 |
Discontinued operations |
|
|
- |
|
|
0.02 |
|
|
- |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic and diluted |
|
$ |
0.13 |
|
$ |
0.16 |
|
$ |
0.42 |
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,679 |
|
$ |
2,754 |
|
$ |
8,340 |
|
$ |
7,941 |
Other comprehensive income - change in fair value of interest rate swaps |
|
|
38 |
|
|
2 |
|
|
41 |
|
|
145 |
Comprehensive income |
|
|
2,717 |
|
|
2,756 |
|
|
8,381 |
|
|
8,086 |
Comprehensive income attributable to noncontrolling interest |
|
|
1,972 |
|
|
1,918 |
|
|
6,057 |
|
|
5,623 |
Comprehensive income attributable to Sterling Real Estate Trust |
|
$ |
745 |
|
$ |
838 |
|
$ |
2,324 |
|
$ |
2,463 |
See Notes to Consolidated Financial Statements
5
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED September 30, 2014 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
Accumulated |
|
Total |
|
|
|
|
Accumulated |
|
|
|
||||
|
|
Common |
|
Shares |
|
Earnings |
|
Beneficial |
|
Noncontrolling |
|
Comprehensive |
|
|
|
|||||
|
|
Shares |
|
Amount |
|
(Deficit) |
|
Interest |
|
Interest |
|
Loss |
|
Total |
||||||
|
|
(in thousands) |
||||||||||||||||||
BALANCE, DECEMBER 31, 2013 |
|
5,454 |
|
$ |
68,051 |
|
$ |
(12,075) |
|
$ |
55,976 |
|
$ |
141,539 |
|
$ |
(309) |
|
$ |
197,206 |
Shares issued pursuant to trustee compensation plan |
|
2 |
|
|
23 |
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
23 |
Contribution of assets in exchange for the issuance of noncontrolling interest shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
16,156 |
|
|
|
|
|
16,156 |
Shares/units redeemed |
|
(218) |
|
|
(3,049) |
|
|
|
|
|
(3,049) |
|
|
(1,138) |
|
|
|
|
|
(4,187) |
Dividends declared |
|
|
|
|
|
|
|
(3,683) |
|
|
(3,683) |
|
|
(9,664) |
|
|
|
|
|
(13,347) |
Dividends reinvested - stock dividend |
|
172 |
|
|
2,392 |
|
|
|
|
|
2,392 |
|
|
|
|
|
|
|
|
2,392 |
Issuance of shares under optional purchase plan |
|
91 |
|
|
1,330 |
|
|
|
|
|
1,330 |
|
|
|
|
|
|
|
|
1,330 |
UPREIT units converted to REIT common shares |
|
47 |
|
|
700 |
|
|
|
|
|
700 |
|
|
(700) |
|
|
|
|
|
— |
Purchase of subsidiary ownership from noncontrolling interest |
|
|
|
|
(810) |
|
|
— |
|
|
(810) |
|
|
101 |
|
|
|
|
|
(709) |
Increase in fair value of interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
41 |
Distributions paid to consolidated real estate entity noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(11) |
|
|
|
|
|
(11) |
Net income |
|
|
|
|
|
|
|
2,312 |
|
|
2,312 |
|
|
6,028 |
|
|
|
|
|
8,340 |
BALANCE, SEPTEMBER 30, 2014 |
|
5,548 |
|
$ |
68,637 |
|
$ |
(13,446) |
|
$ |
55,191 |
|
$ |
152,311 |
|
$ |
(268) |
|
$ |
207,234 |
See Notes to Consolidated Financial Statements
6
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 2014 AND 2013 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2014 |
|
2013 |
||
|
|
(in thousands) |
||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
|
$ |
8,340 |
|
$ |
7,941 |
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
Gain on sale of real estate |
|
|
(69) |
|
|
(37) |
Net gain on investment in marketable securities |
|
|
(463) |
|
|
— |
Gain on involuntary conversion |
|
|
(24) |
|
|
(17) |
Loss on impairment of property |
|
|
— |
|
|
226 |
Equity in income of unconsolidated affiliates |
|
|
(785) |
|
|
(604) |
Depreciation |
|
|
8,834 |
|
|
8,047 |
Amortization |
|
|
1,379 |
|
|
1,370 |
Effects on operating cash flows due to changes in |
|
|
|
|
|
|
Tenant security deposits |
|
|
(239) |
|
|
(295) |
Due from related party |
|
|
59 |
|
|
337 |
Receivables |
|
|
627 |
|
|
(1,074) |
Prepaid expenses |
|
|
990 |
|
|
707 |
Marketable securities |
|
|
(7,219) |
|
|
— |
Other assets |
|
|
(8) |
|
|
(3,471) |
Due to related party |
|
|
(87) |
|
|
16 |
Tenant security deposits payable |
|
|
235 |
|
|
368 |
Accounts payable - trade |
|
|
(41) |
|
|
111 |
Accrued expenses and other liabilities |
|
|
2,020 |
|
|
2,688 |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
13,549 |
|
|
16,313 |
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
Purchase of real estate investment properties |
|
|
(4,986) |
|
|
(13,018) |
Capital expenditures and tenant improvements |
|
|
(7,186) |
|
|
(4,026) |
Proceeds from sale of real estate investments |
|
|
625 |
|
|
276 |
Proceeds from involuntary conversion |
|
|
— |
|
|
252 |
Investment in unconsolidated affiliates |
|
|
(648) |
|
|
(199) |
Distributions received from unconsolidated affiliates |
|
|
1,081 |
|
|
849 |
Real estate tax, insurance and replacement reserve escrows |
|
|
(602) |
|
|
(3,939) |
Notes receivable issued |
|
|
(600) |
|
|
— |
Notes receivable payments received |
|
|
— |
|
|
4 |
Deferred insurance proceeds |
|
|
189 |
|
|
(91) |
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(12,127) |
|
|
(19,892) |
See Notes to Consolidated Financial Statements
7
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 2014 AND 2013 (UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
||||
|
|
September 30, |
|
||||
|
|
2014 |
|
2013 |
|
||
|
|
(in thousands) |
|
||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Payments for financing costs |
|
|
(382) |
|
|
— |
|
Payments on investment certificates |
|
|
(6) |
|
|
(379) |
|
Reinvested proceeds from investment certificates |
|
|
8 |
|
|
— |
|
Principal payments on special assessments payable |
|
|
(25) |
|
|
(6) |
|
Proceeds from issuance of mortgage notes payable |
|
|
13,908 |
|
|
29,054 |
|
Principal payments on mortgage notes payable |
|
|
(5,833) |
|
|
(14,838) |
|
Proceeds from issuance of shares under optional purchase plan |
|
|
1,330 |
|
|
789 |
|
Shares/units redeemed |
|
|
(4,187) |
|
|
(3,078) |
|
Dividends/distributions paid |
|
|
(10,450) |
|
|
(8,850) |
|
Payment of syndication costs |
|
|
— |
|
|
(67) |
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
(5,637) |
|
|
2,625 |
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(4,215) |
|
|
(954) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
13,849 |
|
|
4,556 |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
9,634 |
|
$ |
3,602 |
|
|
|
|
|
|
|
|
|
SCHEDULE OF CASH FLOW INFORMATION |
|
|
|
|
|
||
Cash paid during the period for interest, net of capitalized interest |
|
$ |
9,179 |
|
$ |
8,476 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Dividends reinvested |
|
$ |
2,392 |
|
$ |
2,034 |
|
Dividends declared and not paid |
|
|
1,248 |
|
|
1,134 |
|
UPREIT distributions declared and not paid |
|
|
3,277 |
|
|
2,689 |
|
UPREIT units converted to REIT common shares |
|
|
700 |
|
|
69 |
|
Stock issued pursuant to trustee compensation plan |
|
|
23 |
|
|
|
|
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT |
|
|
15,466 |
|
|
25,109 |
|
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 |
|
|
167 |
|
|
147 |
|
Unrealized gain on interest rate swaps |
|
|
(41) |
|
|
(145) |
|
Acquisition of assets through assumption of debt and liabilities and property purchased with financing |
|
|
705 |
|
|
4,500 |
|
Capitalized interest related to construction in progress |
|
|
158 |
|
|
— |
|
Acquisition of assets with accounts payable |
|
|
937 |
|
|
(348) |
|
See Notes to Consolidated Financial Statements
8
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Sterling Real Estate Trust f/k/a INREIT Real Estate Investment Trust (“Sterling”) 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” f/k/a INREIT Properties, LLLP) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of September 30, 2014 and December 31, 2013, Sterling owned approximately 27.6% and 28.7%, respectively, of the operating partnership. The operating partnership is the 100% owner of 39 single asset limited liability companies.
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, 2013, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2014 and consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the the three and nine months ended September 30, 2014 and 2013, 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 position as of September 30, 2014 and our consolidated statements of operations and other comprehensive income, consolidated statements of shareholders’ equity and our consolidated statement cash flows for the three and nine months ended September 30, 2014 and 2013, as applicable. These adjustments are of a normal recurring nature.
Principles of Consolidation
The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and 39 single asset limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.
Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.
9
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Principal Business Activity
Sterling currently owns directly and indirectly 130 properties. The trust’s 83 residential properties are located in North Dakota, Minnesota, and Nebraska and are principally multi-family apartment buildings. The trust owns 47 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the trust’s mix of properties is 66.1% residential and 33.9% commercial (based on cost) and total $422,113 in real estate investments at September 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Property |
|
Location |
|
No. of Properties |
|
Units |
|
|
North Dakota |
|
72 |
|
4,680 |
|
|
Minnesota |
|
9 |
|
1,453 |
|
|
Nebraska |
|
2 |
|
316 |
|
|
|
|
83 |
|
6,449 |
|
|
|
|
|
|
|
Commercial Property |
|
Location |
|
No. of Properties |
|
Sq. Ft |
|
|
North Dakota |
|
20 |
|
810,496 |
|
|
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 |
|
|
|
|
47 |
|
1,369,423 |
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 nine months ended September 30, 2014 and 2013.
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 September 30, 2014 and December 31, 2013 of $2,338 and $2,383, respectively. We owed $941 and $960 of our respective share of the mortgage loan balance as of September 30, 2014 and December 31, 2013, respectively. However, the operating partnership is jointly and severally liable for the full mortgage balance.
10
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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 September 30, 2014 and December 31, 2013 of $11,304 and $11,432, respectively. We owed $5,652 and $5,716 for our respective share of the mortgage loan balance as of September 30, 2014 and December 31, 2013, respectively. However, the operating partnership is jointly and severally liable for the full mortgage balance.
The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at September 30, 2014 and December 31, 2013 of $7,253 and $7,349, respectively. We owed $4,836 and $4,899 for our respective share of the mortgage loan balance on September 30, 2014 and December 31, 2013, respectively. However, the operating partnership 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 September 30, 2014 and December 31, 2013, 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 September 30, 2014, the property owned by the Transit Center consisted of land previously occupied by a building and parking ramp in Duluth, Minnesota which were demolished during the three months ended September 30, 2014. The property was unencumbered at September 30, 2014 and December 31, 2013, 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 a joint venture 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’s and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns. As of September 30, 2014, we assessed one of our joint venture arrangements as a variable interest entity where we were not the primary beneficiary. In addition, four of our joint venture arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810.
As of September 30, 2014 and December 31, 2013, the unconsolidated affiliates held total assets of $32,379 and $31,289 and mortgage notes payable of $20,896 and $21,164, respectively.
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.
11
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Use of Estimates
The preparation of 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 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.
12
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:
|
|
|
Buildings and improvements |
|
40 years |
Furniture and fixtures |
|
9 years |
Depreciation expense for the three months ended September 30, 2014 and 2013 totaled $3,013 and $2,755, respectively.
Depreciation expense for the nine months ended September 30, 2014 and 2013 totaled $8,834 and $8,047, respectively.
The Company’s investment properties are reviewed for potential impairment at the end of each reporting period whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Company separately determines whether impairment indicators exist for each property.
Examples of situations considered to be impairment indicators include, but are not limited to:
· |
a substantial decline or continued low occupancy rate; |
· |
continued difficulty in leasing space; |
· |
significant 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 nine months ended September 30, 2014 and 2013. Based on evaluation, there were $226 of impairment losses during the three and nine months ended September 30, 2013.
13
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Properties Held for Sale
We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component or group of components of an entity either has been disposed of or is classified as held for sale.
In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as properties held for sale in the period in which all of the following criteria are met:
· |
management, having the authority to approve the action, commits to a plan to sell the asset; |
· |
the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; |
· |
an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated; |
· |
the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; |
· |
the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and |
· |
given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. |
The results of operations of a component of an entity that either has been disposed of or is classified as held-for-sale under the requirements of ASC 360, shall be reported in discontinued operations in accordance with ASC 205, Presentation of Financial Statements (“ASC 205”) if both of the following conditions are met:
· |
operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity as a result of the disposal transaction; |
· |
the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. |
There were no properties classified as held for sale at September 30, 2014 or December 31, 2013. See Note 20.
Cash and Cash Equivalents
We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.
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 September 30, 2014 and December 31, 2013, management determined no allowance was necessary for uncollectible receivables.
Investment in Marketable Securities
Investments in marketable securities are classified as trading consistent with the Company’s overall investment objectives and activities. Accordingly, all unrealized gains and losses on the Company’s marketable securities investment portfolio are included in the consolidated statements of operations and other comprehensive income.
14
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Gross gains and losses on the sale of marketable securities are based on the first-in first-out method of determining cost.
Financing and Lease Costs
Financing costs incurred in connection with financing 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 September 30, 2014 and 2013.
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
15
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.
We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of September 30, 2014 and December 31, 2013 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 2011.
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 $31 and $79 for the three months ended September 30, 2014 and 2013, respectively. The straight-line rent adjustment increased revenue by $163 and $304 for the nine months ended September 30, 2014 and 2013, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of September 30, 2014 and December 31, 2013 was $2,515 and $2,352, 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 September 30, 2014 and 2013, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.
For the three months ended September 30, 2014 and 2013, Sterling’s denominators for the basic and diluted earnings per common share were approximately 5,517,000 and 5,405,000, respectively. For the nine months ended September 30, 2014 and 2013, Sterling’s denominators for the basic and diluted earnings per common share were approximately 5,467,000 and 5,358,000, respectively.
16
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Recent Accounting Pronouncements
In April 2014, the 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 condensed consolidated statements of comprehensive operations.
In May 2014, the Financial Accounting Standards Board, or 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. ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, with no early adoption permitted, and 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.
NOTE 3 – segment reporting
We report our results in two reportable segments: residential and commercial properties. Our residential properties include multi-family and assisted senior living 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.
17
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Segment Revenues and Net Operating Income
The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the three and nine months ended September 30, 2014 and 2013, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2014 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Income from rental operations |
|
$ |
13,485 |
|
$ |
4,266 |
|
$ |
17,751 |
Expenses from rental operations |
|
|
7,202 |
|
|
757 |
|
|
7,959 |
Net operating income |
|
$ |
6,283 |
|
$ |
3,509 |
|
|
9,792 |
Interest |
|
|
|
|
|
|
|
|
3,051 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
3,485 |
Administration of REIT |
|
|
|
|
|
|
|
|
977 |
Other (income)/expense |
|
|
|
|
|
|
|
|
(400) |
Net income |
|
|
|
|
|
|
|
$ |
2,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2013 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Income from rental operations |
|
$ |
10,766 |
|
$ |
4,722 |
|
$ |
15,488 |
Expenses from rental operations |
|
|
4,972 |
|
|
1,181 |
|
|
6,153 |
Net operating income |
|
$ |
5,794 |
|
$ |
3,541 |
|
|
9,335 |
Interest |
|
|
|
|
|
|
|
|
2,683 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
3,047 |
Administration of REIT |
|
|
|
|
|
|
|
|
1,157 |
Loss on impairment of property |
|
|
|
|
|
|
|
|
226 |
Other (income)/expense |
|
|
|
|
|
|
|
|
(267) |
Income from continuing operations |
|
|
|
|
|
|
|
|
2,489 |
Discontinued operations |
|
|
|
|
|
|
|
|
265 |
Net income |
|
|
|
|
|
|
|
$ |
2,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2014 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Income from rental operations |
|
$ |
39,011 |
|
$ |
13,086 |
|
$ |
52,097 |
Expenses from rental operations |
|
|
20,364 |
|
|
2,281 |
|
|
22,645 |
Net operating income |
|
$ |
18,647 |
|
$ |
10,805 |
|
|
29,452 |
Interest |
|
|
|
|
|
|
|
|
9,197 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
10,216 |
Administration of REIT |
|
|
|
|
|
|
|
|
3,331 |
Other (income)/expense |
|
|
|
|
|
|
|
|
(1,632) |
Net income |
|
|
|
|
|
|
|
$ |
8,340 |
18
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2013 |
|
|
Residential |
|
|
Commercial |
|
|
Total |
|
|
(in thousands) |
|||||||
Income from rental operations |
|
$ |
30,917 |
|
$ |
14,103 |
|
$ |
45,020 |
Expenses from rental operations |
|
|
14,020 |
|
|
3,462 |
|
|
17,482 |
Net operating income |
|
$ |
16,897 |
|
$ |
10,641 |
|
|
27,538 |
Interest |
|
|
|
|
|
|
|
|
8,036 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
8,848 |
Administration of REIT |
|
|
|
|
|
|
|
|
3,926 |
Loss on impairment of property |
|
|
|
|
|
|
|
|
226 |
Other (income)/expense |
|
|
|
|
|
|
|
|
(642) |
Income from continuing operations |
|
|
|
|
|
|
|
|
7,144 |
Discontinued operations |
|
|
|
|
|
|
|
|
797 |
Net income |
|
|
|
|
|
|
|
$ |
7,941 |
Segment Assets and Accumulated Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2014 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Real estate investments |
|
$ |
325,280 |
|
$ |
152,431 |
|
$ |
477,711 |
Accumulated depreciation |
|
|
(36,307) |
|
|
(19,291) |
|
|
(55,598) |
|
|
$ |
288,973 |
|
$ |
133,140 |
|
|
422,113 |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
9,634 |
Restricted deposits and funded reserves |
|
|
|
|
|
|
|
|
6,426 |
Investment in unconsolidated affiliates |
|
|
|
|
|
|
|
|
9,032 |
Receivables and other assets |
|
|
|
|
|
|
|
|
3,845 |
Investment in marketable securities |
|
|
|
|
|
|
|
|
7,682 |
Financing and lease costs, less accumulated amortization |
|
|
|
|
|
|
|
|
2,750 |
Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
|
9,521 |
Total Assets |
|
|
|
|
|
|
|
$ |
471,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Real estate investments |
|
$ |
296,377 |
|
$ |
153,873 |
|
$ |
450,250 |
Accumulated depreciation |
|
|
(30,075) |
|
|
(16,983) |
|
|
(47,058) |
|
|
$ |
266,302 |
|
$ |
136,890 |
|
|
403,192 |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
13,849 |
Restricted deposits and funded reserves |
|
|
|
|
|
|
|
|
5,585 |
Investment in unconsolidated affiliates |
|
|
|
|
|
|
|
|
7,366 |
Receivables and other assets |
|
|
|
|
|
|
|
|
4,879 |
Financing and lease costs, less accumulated amortization |
|
|
|
|
|
|
|
|
2,950 |
Intangible assets, less accumulated amortization |
|
|
|
|
|
|
|
|
10,479 |
Total Assets |
|
|
|
|
|
|
|
$ |
448,300 |
19
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
note 4 – real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2014 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Land and land improvements |
|
$ |
38,891 |
|
$ |
28,285 |
|
$ |
67,176 |
Building and improvements |
|
|
262,015 |
|
|
122,680 |
|
|
384,695 |
Furniture and fixtures |
|
|
18,984 |
|
|
1,466 |
|
|
20,450 |
Construction in progress |
|
|
5,390 |
|
|
— |
|
|
5,390 |
|
|
|
325,280 |
|
|
152,431 |
|
|
477,711 |
Less accumulated depreciation |
|
|
(36,307) |
|
|
(19,291) |
|
|
(55,598) |
|
|
$ |
288,973 |
|
$ |
133,140 |
|
$ |
422,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 |
|
Residential |
|
Commercial |
|
Total |
|||
|
|
(in thousands) |
|||||||
Land and land improvements |
|
$ |
36,625 |
|
$ |
28,506 |
|
$ |
65,131 |
Building and improvements |
|
|
240,343 |
|
|
123,900 |
|
|
364,243 |
Furniture and fixtures |
|
|
17,372 |
|
|
1,467 |
|
|
18,839 |
Construction in progress |
|
|
2,037 |
|
|
— |
|
|
2,037 |
|
|
|
296,377 |
|
|
153,873 |
|
|
450,250 |
Less accumulated depreciation |
|
|
(30,075) |
|
|
(16,983) |
|
|
(47,058) |
|
|
$ |
266,302 |
|
$ |
136,890 |
|
$ |
403,192 |
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 is estimated to cost $16,000 and is expected to be substantially completed in June 2015. The Company is working with GOLDMARK Development Corporation, a related party, as the general contractor for the project. Building one of four was placed in service August 2014 and approximately $3,319 was reclassified from construction in progress to placed in service. Subsequent to quarter end, building two of four was placed in service as of October 15, 2014. See Note 16 for additional information.
NOTE 5 – 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 amount of $1,294 and $2,450 to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature on 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 September 30, 2014 and December 31, 2013, we have recorded a liability and other comprehensive loss of $268 and $309, respectively.
20
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 6 – 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 7 – investment in marketable securities
Investments in marketable securities consist of real estate backed equity securities. These securities are stated at market value, as determined by the most recently traded price of each security at the balance sheet date. Consistent with the Company’s overall investment objectives and activities, the marketable securities portfolio is classified as trading (as defined by U.S. generally accepted accounting principles). Accordingly all unrealized gains and losses on this portfolio are recorded in income. The following table summarizes the Company’s investment in marketable securities as of September 30, 2014. As of December 31, 2013, the Company held no marketable securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2014 |
|||||||
|
|
Cost |
|
Fair |
|
Unrealized |
|||
|
|
Basis |
|
Value |
|
Gain (Loss) |
|||
|
|
(in thousands) |
|||||||
Common stock |
|
$ |
2,026 |
|
$ |
2,064 |
|
$ |
37 |
Preferred stock |
|
|
4,369 |
|
|
4,701 |
|
|
333 |
Mutual funds, Exchange-traded funds and other |
|
|
873 |
|
|
917 |
|
|
44 |
Total equity securities |
|
$ |
7,268 |
|
$ |
7,682 |
|
$ |
414 |
Net gain from investments in marketable securities for the nine months ended September 30, 2014 is summarized below:
|
|
|
|
|
|
September 30, 2014 |
|
|
|
(in thousands) |
|
Net realized (loss) gain from sales of marketable securities |
|
$ |
48 |
Net unrealized gain from marketable securities |
|
|
414 |
Dividend income |
|
|
252 |
|
|
$ |
714 |
NOTE 8 - Lease intangibles
The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
Accumulated |
|
Lease |
|||
As of September 30, 2014 |
|
Intangibles |
|
Amortization |
|
Intangibles, net |
|||
|
|
(in thousands) |
|||||||
In-place leases |
|
$ |
11,622 |
|
$ |
(4,121) |
|
$ |
7,501 |
Above-market leases |
|
|
2,466 |
|
|
(446) |
|
|
2,020 |
Below-market leases |
|
|
(1,378) |
|
|
536 |
|
|
(842) |
|
|
$ |
12,710 |
|
$ |
(4,031) |
|
$ |
8,679 |
21
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
Accumulated |
|
Lease |
|||
As of December 31, 2013 |
|
Intangibles |
|
Amortization |
|
Intangibles, net |
|||
|
|
(in thousands) |
|||||||
In-place leases |
|
$ |
11,733 |
|
$ |
(3,383) |
|
$ |
8,350 |
Above-market leases |
|
|
2,466 |
|
|
(337) |
|
|
2,129 |
Below-market leases |
|
|
(1,385) |
|
|
432 |
|
|
(953) |
|
|
$ |
12,814 |
|
$ |
(3,288) |
|
$ |
9,526 |
The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
|
|
|
|
|
|
|
|
Years ending December 31, |
|
Amount |
|
|
|
(in thousands) |
|
2015 |
|
$ |
1,055 |
2016 |
|
|
1,055 |
2017 |
|
|
1,055 |
2018 |
|
|
1,055 |
2019 |
|
|
1,055 |
Thereafter |
|
|
3,404 |
|
|
$ |
8,679 |
|
|
|
|
The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of September 30, 2014 was 12.0 years.
NOTE 9 – LINES OF CREDIT
We have a $15,000 variable rate (1-month LIBOR plus 2.35%) line of credit agreement with Wells Fargo Bank, which expires in July 2015; a $3,000 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expired November 1, 2014; and a $2,660 variable rate (prime rate less 0.25%) line of credit agreement with Bell State Bank & Trust, which expires in April 2015. The lines of credit are secured by properties in Duluth, Minnesota; St. Cloud, Minnesota; Minneapolis/St. Paul, Minnesota, Moorhead, Minnesota, Fargo, North Dakota, Mandan, North Dakota, and Austin, Texas, respectively. We also have a $1,000 variable rate (the greater of the prime rate or 3.25%) unsecured line of credit agreement with Bremer Bank, which expired October 31, 2014. At December 31, 2013, there was no balance outstanding on the lines of credit, leaving $21,000 unused under the agreements. The line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of September 30, 2014 and December 31, 2013, we were in compliance with all covenants.
Subsequent to September 30, 2014 the $3,000 variable rate line of credit with Bremer Bank was extended to January 31, 2015 while negotiations are ongoing to renew the line. In addition, the $1,000 unsecured line of credit with Bremer Bank was increased to $2,000 with a variable interest rate equal to the prime rate less 0.5% maturing October 31, 2015.
22
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 10 - MORTGAGE NOTES PAYABLE
The following table summarizes the Company’s mortgage notes payable. As of September 30, 2014 and December 31, 2013 all are fixed rate notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Principal Balance At |
|||||
|
|
|
|
Rate Per |
|
September 30, |
|
December 31, |
|||
Maturity Date |
|
Property Name |
|
Annum |
|
2014 |
|
2013 |
|||
|
|
|
|
|
|
|
(in thousands) |
||||
Residential Properties |
|
|
|
|
|
|
|
||||
April-2021 |
|
Arbor I |
|
4.48 |
% |
|
$ |
452 |
|
$ |
— |
April-2021 |
|
Arbor II |
|
4.48 |
% |
|
|
462 |
|
|
— |
April-2021 |
|
Arbor III |
|
4.48 |
% |
|
|
459 |
|
|
— |
October-2017 |
|
Auburn II |
|
6.30 |
% |
|
|
616 |
|
|
625 |
July-2019 |
|
Autumn Ridge 3 &4 |
|
4.50 |
% |
|
|
3,225 |
|
|
3,318 |
January-2016 |
|
Autumn Ridge 1 & 2 |
|
5.74 |
% |
|
|
2,822 |
|
|
2,868 |
October-2033 |
|
Bayview |
|
4.62 |
% |
|
|
3,497 |
|
|
3,582 |
June-2018 |
|
Berkshire |
|
3.75 |
% |
|
|
299 |
|
|
311 |
June-2024 |
|
Betty Ann and Martha Alice |
|
3.95 |
% |
|
|
1,178 |
|
|
1,203 |
September-2021 |
|
Brookfield |
|
3.75 |
% |
|
|
1,251 |
|
|
1,366 |
September-2036 |
|
Carling Manor |
|
4.10 |
% |
|
|
527 |
|
|
538 |
July-2021 |
|
Carlton Place |
|
4.34 |
% |
|
|
7,567 |
|
|
— |
August-2034 |
|
Columbia West |
|
4.61 |
% |
|
|
3,436 |
|
|
— |
November-2024 |
|
Country Club and Country Side |
|
4.10 |
% |
|
|
585 |
|
|
619 |
October-2033 |
|
Courtyard |
|
3.92 |
% |
|
|
4,362 |
|
|
4,475 |
October-2019 |
|
Danbury |
|
5.03 |
% |
|
|
2,979 |
|
|
3,037 |
October-2028 |
|
Dellwood |
|
4.55 |
% |
|
|
8,010 |
|
|
8,146 |
March-2017 |
|
Eagle Run |
|
3.95 |
% |
|
|
4,616 |
|
|
4,713 |
June-2018 |
|
Emerald Court |
|
3.75 |
% |
|
|
612 |
|
|
637 |
July-2024 |
|
Fairview |
|
3.95 |
% |
|
|
3,202 |
|
|
3,257 |
June-2023 |
|
Flickertail |
|
3.75 |
% |
|
|
5,866 |
|
|
5,947 |
June-2020 |
|
Forest |
|
4.55 |
% |
|
|
478 |
|
|
492 |
December-2017 |
|
Galleria III |
|
4.10 |
% |
|
|
617 |
|
|
630 |
August-2029 |
|
Glen Pond |
|
5.17 |
% |
|
|
15,861 |
|
|
16,096 |
April-2031 |
|
Griffin Court |
|
4.38 |
% |
|
|
695 |
|
|
— |
April-2021 |
|
Hannifin |
|
4.48 |
% |
|
|
519 |
|
|
— |
October-2017 |
|
Hunter's Run I |
|
6.30 |
% |
|
|
296 |
|
|
300 |
April-2021 |
|
Islander |
|
4.48 |
% |
|
|
942 |
|
|
— |
June-2020 |
|
Kennedy |
|
4.55 |
% |
|
|
521 |
|
|
537 |
December-2017 |
|
Library Lane |
|
6.10 |
% |
|
|
1,888 |
|
|
1,915 |
May-2021 |
|
Maple Ridge |
|
5.69 |
% |
|
|
4,306 |
|
|
4,353 |
October-2028 |
|
Maplewood Bend |
|
4.58 |
% |
|
|
5,488 |
|
|
5,580 |
February-2018 |
|
Mayfair |
|
3.63 |
% |
|
|
799 |
|
|
822 |
October-2023 |
|
Montreal Courts |
|
4.91 |
% |
|
|
19,762 |
|
|
19,976 |
September-2017 |
|
Oak Court |
|
5.98 |
% |
|
|
1,839 |
|
|
1,863 |
June-2020 |
|
Pacific Park I |
|
4.55 |
% |
|
|
775 |
|
|
798 |
June-2020 |
|
Pacific Park II |
|
4.55 |
% |
|
|
664 |
|
|
683 |
June-2020 |
|
Pacific Park South |
|
4.55 |
% |
|
|
409 |
|
|
421 |
23
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Principal Balance At |
|||||
|
|
|
|
Rate Per |
|
September 30, |
|
December 31, |
|||
Maturity Date |
|
Property Name |
|
Annum |
|
2014 |
|
2013 |
|||
|
|
|
|
|
|
|
(in thousands) |
||||
February-2018 |
|
Parkwood |
|
3.63 |
% |
|
|
1,174 |
|
|
1,208 |
December-2023 |
|
Pebble Creek |
|
4.65 |
% |
|
|
4,624 |
|
|
4,700 |
June-2018 |
|
Prairiewood Courts |
|
3.75 |
% |
|
|
1,479 |
|
|
1,539 |
October-2020 |
|
Prairiewood Meadows |
|
6.17 |
% |
|
|
2,353 |
|
|
2,386 |
November-2023 |
|
Richfield/Harrison |
|
4.39 |
% |
|
|
6,379 |
|
|
6,488 |
September-2017 |
|
Rosegate |
|
5.93 |
% |
|
|
2,343 |
|
|
2,373 |
September-2036 |
|
Saddlebrook |
|
4.10 |
% |
|
|
1,084 |
|
|
1,107 |
August-2019 |
|
Sierra Ridge Phase I |
|
5.46 |
% |
|
|
2,619 |
|
|
2,668 |
November-2019 |
|
Sierra Ridge Phase II |
|
5.92 |
% |
|
|
3,310 |
|
|
3,362 |
October-2022 |
|
Somerset |
|
4.01 |
% |
|
|
3,273 |
|
|
3,318 |
July-2021 |
|
Southgate |
|
5.96 |
% |
|
|
2,971 |
|
|
3,019 |
February-2020 |
|
Southview III |
|
4.50 |
% |
|
|
232 |
|
|
236 |
December-2017 |
|
Southview Villages |
|
6.10 |
% |
|
|
2,064 |
|
|
2,094 |
June-2020 |
|
Spring |
|
4.55 |
% |
|
|
633 |
|
|
651 |
April-2015 |
|
Stonybrook |
|
5.40 |
% |
|
|
5,489 |
|
|
5,574 |
January-2022 |
|
Sunset Ridge |
|
4.44 |
% |
|
|
9,026 |
|
|
9,146 |
May-2019 |
|
Sunview |
|
4.10 |
% |
|
|
1,206 |
|
|
1,230 |
April-2023 |
|
Sunwood Estates |
|
4.37 |
% |
|
|
2,995 |
|
|
3,032 |
June-2019 |
|
Terrace on the Green |
|
6.53 |
% |
|
|
2,139 |
|
|
2,163 |
October-2022 |
|
Twin Parks |
|
4.01 |
% |
|
|
2,327 |
|
|
2,359 |
May-2019 |
|
Village |
|
4.10 |
% |
|
|
1,064 |
|
|
1,085 |
July-2016 |
|
Village Park |
|
6.15 |
% |
|
|
862 |
|
|
884 |
June-2018 |
|
Westwind |
|
3.75 |
% |
|
|
340 |
|
|
354 |
June-2020 |
|
Westwood |
|
4.55 |
% |
|
|
4,901 |
|
|
5,041 |
April-2023 |
|
Willow Park |
|
3.59 |
% |
|
|
4,348 |
|
|
4,434 |
Commercial Properties |
|
|
|
|
|
|
|
|
|
|
|
September-2017 |
|
Guardian Building Products |
|
3.45 |
% |
|
|
2,252 |
|
|
2,318 |
October-2033 |
|
Titan Machinery - Dickinson, ND |
|
4.50 |
% |
|
|
972 |
|
|
996 |
December-2019 |
|
Titan Machinery - Fargo, ND |
|
4.18 |
% |
|
|
1,165 |
|
|
1,198 |
August-2033 |
|
Titan Machinery - Marshall, MN |
|
4.50 |
% |
|
|
2,249 |
|
|
2,304 |
August-2017 |
|
Titan Machinery - Minot, ND |
|
3.29 |
% |
|
|
1,699 |
|
|
1,750 |
February-2023 |
|
Titan Machinery - Redwood Falls, MN |
|
4.25 |
% |
|
|
1,709 |
|
|
1,754 |
October-2028 |
|
Titan Machinery - Sioux City, IA |
|
4.50 |
% |
|
|
1,674 |
|
|
1,736 |
March-2016 |
|
Bio-life Properties - ND, MN, WI (9 total) |
|
7.65 |
% |
|
|
7,850 |
|
|
8,800 |
December-2016 |
|
Bio-life Properties - Marquette, MI |
|
7.06 |
% |
|
|
1,121 |
|
|
1,258 |
August-2017 |
|
Aetna |
|
5.93 |
% |
|
|
6,849 |
|
|
6,945 |
December-2017 |
|
32nd Avenue Office (a) |
|
2.57 |
% |
|
|
2,231 |
|
|
2,272 |
March-2019 |
|
Echelon |
|
4.25 |
% |
|
|
1,125 |
|
|
1,161 |
April-2018 |
|
Gate City |
|
3.97 |
% |
|
|
1,024 |
|
|
1,050 |
September-2020 |
|
Goldmark Office Park |
|
5.33 |
% |
|
|
4,225 |
|
|
4,664 |
April-2020 |
|
Great American Building (a) |
|
7.25 |
% |
|
|
1,046 |
|
|
1,072 |
October-2015 |
|
Regis |
|
5.68 |
% |
|
|
9,360 |
|
|
9,527 |
April-2018 |
|
Dairy Queen - Dickinson, ND |
|
3.63 |
% |
|
|
675 |
|
|
709 |
April-2025 |
|
Walgreens-Alexandria |
|
5.69 |
% |
|
|
1,996 |
|
|
2,097 |
24
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Principal Balance At |
|||||
|
|
|
|
Rate Per |
|
September 30, |
|
December 31, |
|||
Maturity Date |
|
Property Name |
|
Annum |
|
2014 |
|
2013 |
|||
|
|
|
|
|
|
|
(in thousands) |
||||
March-2034 |
|
Walgreens-Batesville |
|
6.85 |
% |
|
|
6,346 |
|
|
6,460 |
June-2021 |
|
Walgreens-Colorado |
|
4.50 |
% |
|
|
4,254 |
|
|
4,339 |
August-2033 |
|
Walgreens-Fayetteville |
|
6.85 |
% |
|
|
4,870 |
|
|
4,962 |
October-2024 |
|
Walgreens-Laurel |
|
6.07 |
% |
|
|
1,977 |
|
|
2,077 |
|
|
|
|
|
|
|
$ |
247,786 |
|
$ |
239,008 |
(a) |
interest rate per annum is swap rate |
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 of September 30, 2014 and December 31, 2013 we were in compliance with all covenants.
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) |
|
2014 (October 1, 2014 to December 31, 2014) |
|
$ |
2,070 |
2015 |
|
|
22,945 |
2016 |
|
|
20,133 |
2017 |
|
|
36,033 |
2018 |
|
|
11,298 |
2019 |
|
|
19,359 |
Thereafter |
|
|
135,948 |
Total payments |
|
$ |
247,786 |
|
|
|
|
NOTE 11 - FAIR VALUE MEASUREMENT
The following table presents the carrying value and estimated fair value of the Company’s financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2014 |
|
December 31, 2013 |
||||||||
|
|
Carrying |
|
|
|
|
Carrying |
|
|
|
||
|
|
Value |
|
Fair Value |
|
Value |
|
Fair Value |
||||
|
|
(in thousands) |
||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in marketable securities |
|
$ |
7,682 |
|
$ |
7,682 |
|
$ |
— |
|
$ |
— |
|
|
(in thousands) |
||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
247,786 |
|
$ |
252,994 |
|
$ |
239,008 |
|
$ |
240,486 |
Fair value of interest rate swaps |
|
$ |
268 |
|
$ |
268 |
|
$ |
309 |
|
$ |
309 |
25
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
The carrying values shown in the table are included in the consolidated balance sheets under the indicated captions.
ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.
These two types of inputs create the following fair value hierarchy:
· |
Level 1 – Quoted prices for identical instruments in active markets; |
· |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; |
· |
Level 3 – Instruments whose significant inputs are unobservable. |
The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
|
(in thousands) |
||||||||||
September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest rate swaps |
|
$ |
— |
|
$ |
268 |
|
$ |
— |
|
$ |
268 |
Investment in marketable securities |
|
|
7,682 |
|
|
— |
|
|
— |
|
|
7,682 |
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest rate swaps |
|
$ |
— |
|
$ |
309 |
|
$ |
— |
|
$ |
309 |
Investment in marketable securities: The fair value of the marketable equity securities is determined using quoted market prices at the reporting date multiplied by the quantity held.
Fair value of interest rate swaps: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2014 and December 31, 2013, 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
26
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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 5.
Fair Value Disclosures
The following table presents the Company’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
|
(in thousands) |
||||||||||
September 30, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
— |
|
$ |
— |
|
$ |
252,994 |
|
$ |
252,994 |
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
— |
|
$ |
— |
|
$ |
240,486 |
|
$ |
240,486 |
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 4.40% to 4.53% and from 4.50% to 4.65% at September 30, 2014 and December 31, 2013, respectively. The fair value of the Company’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of September 30, 2014. The Company’s mortgage notes payable are further described in Note 10.
NOTE 12 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP
As of September 30, 2014 and December 31, 2013, outstanding limited partnership units totaled 14,557,000 and 13,547,000 respectively. As of September 30, 2014 and 2013, the operating partnership declared distributions of $3,277 and $2,689 respectively, to limited partners paid in October 2014 and 2013. Distributions per unit were $0.6750 and $0.6300 during the first nine months of 2014 and 2013, respectively.
During the first nine months of 2014 and 2013, Sterling exchanged 47,000 and 5,000 common shares for 47,000 and 5,000 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $700 and $69, respectively.
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.
27
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 13 – REDEMPTION PLANS
On March 11, 2011, our Board of Trustees 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. Originally, the maximum amount of aggregate securities that could be redeemed under these plans was $5,000, and the redemption price was fixed at $12.60 per share or unit under the plans.
On September 7, 2012 and December 20, 2012, our Board of Trustees amended and restated our redemption plans to increase the maximum amount that can be redeemed under the plans to $15,000 worth of securities and increased the fixed redemption price to $12.75 per share or unit under the plans.
On March 28, 2013, our Board of Trustees amended our redemption plans to increase the maximum amount that can be redeemed under the plan to $20,000 worth of securities and increased the fixed redemption price to $13.00 per share or unit under the plans effective May 16, 2013.
On September 26, 2013, our Board of Trustees amended our redemption plans to increase the maximum amount that can be redeemed under the plan to $25,000 worth of securities and increased the fixed redemption price to $14.00 per share or unit under the plans effective October 16, 2013.
On March 27, 2014, our Board of Trustees amended our redemption plans to increase the maximum amount that can be redeemed under the plan to $30,000 worth of securities under the plans effective March 28, 2014.
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 first nine months of 2014 and 2013, the Company redeemed 218,000 and 121,000 common shares valued at $3,049 and $1,547, respectively. In addition, during the first nine months of 2014 and 2013, the Company redeemed 81,000 and 119,000 units valued at $1,138 and $1,531, respectively.
NOTE 14 – 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 September 30, 2014 and December 31, 2013, there were 5,548,000 and 5,454,000 common shares outstanding. We had no preferred shares outstanding as of either date.
Dividends paid to holders of common shares were $0.6750 per share and $0.6300 per share for the nine months ended September 30, 2014 and 2013, respectively.
In May 2014, the Company acquired the remaining ownership interest in the Eagle Run property located in West Fargo, North Dakota. Prior to the merger, the operating partnership was an 81.25% owner in the single asset limited liability partnership. The change in ownership interest has been accounted for as an equity transaction, and no gain or loss has been recognized in consolidated net income or comprehensive income. The following schedule discloses the effects of changes in Sterling’s ownership interest in the subsidiary on Sterling’s equity.
28
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Net income attributable to Sterling and transfers (to) from the noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
||||
|
|
(in thousands) |
|
(in thousands) |
||||||||
Net income attributable to Sterling shareholders |
|
$ |
735 |
|
$ |
837 |
|
$ |
2,312 |
|
$ |
2,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in Sterling's paid-in capital for purchase of remaining interest in Eagle Run Partnership |
|
|
(19) |
|
|
— |
|
|
(810) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to Sterling shareholders and transfers to noncontrolling interest |
|
$ |
716 |
|
$ |
837 |
|
$ |
1,502 |
|
$ |
2,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 – 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 five thousand dollars 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 $15.00 and $14.00 at September 30, 2014 and December 31, 2013, respectively. See discussion of determination of estimated value in Note 21.
Therefore, the purchase price per common share for dividend reinvestments was $14.25 and $13.30 and for additional optional cash purchases was $15.00 and $14.00 at September 30, 2014 and December 31, 2013, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten day notice to participants.
In the nine months ended September 30, 2014, 172,000 shares were issued pursuant to dividend reinvestments and 91,000 shares were issued pursuant to additional optional cash purchases under the plan. In the nine months ended September 30, 2013, 153,000 shares were issued pursuant to dividend reinvestments and 56,000 shares were issued pursuant to additional optional cash purchases under the plan.
29
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 16 – RELATED PARTY TRANSACTIONS
Property Management Fee
During the first nine months of 2014 and 2013, 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 nine months ended September 30, 2014 and 2013, we paid management fees of $4,818 and $3,701, respectively, to GOLDMARK Property Management.
Board of Trustee Fees
We incurred Trustee fees of $35 and $38 during the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, we owed our Trustees $11 for unpaid board of trustee fees. There were no board of trustee fees owed to our Trustees as of December 31, 2013. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 (1) |
|
Board Chairman – Board Meeting |
|
105 shares/meeting |
|
$ |
1,400/meeting |
Trustee – Board Meeting |
|
75 shares/meeting |
|
$ |
1,000/meeting |
Committee Chair – Committee Meeting |
|
30 shares/meeting |
|
$ |
400/meeting |
Trustee – Committee Meeting |
|
30 shares/meeting |
|
$ |
400/meeting |
(1) |
The amounts in the table are actual amounts paid, not rounded. |
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 will 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, 2014, effective January 1, 2014.
Management Fee: 0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.
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
30
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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 |
|
0 – 10M |
|
5.0 |
% |
|
0 - .5M |
|
0M – 5.0% x (TC – 0M) |
10M - 20M |
|
4.5 |
% |
|
.5M - .95M |
|
.50M – 4.5% x (TC – 10M) |
20M – 30M |
|
4.0 |
% |
|
.95M – 1.35M |
|
.95M – 4.0% x (TC – 20M) |
30M – 40M |
|
3.5 |
% |
|
1.35M – 1.70M |
|
1.35M – 3.5% x (TC – 30M) |
40M – 50M |
|
3.0 |
% |
|
1.70M – 2.00M |
|
1.70M – 3.0% x (TC – 40M) |
TC = Total Project Cost
Management Fees
During the first nine months of 2014 and 2013, we incurred advisory management fees of $1,356 and $1,068 with Sterling Management, LLC, our Advisor, for advisory management fees. As of September 30, 2014 and December 31, 2013, we owed our Advisor $156 and $294, 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 first nine months of 2014 and 2013, we incurred acquisition fees of $553 and $1,103, respectively, with our Advisor. There were no acquisition fees owed to our Advisor as of September 30, 2014 and December 31, 2013.
Financing Fees
During the first nine months of 2014 and 2013, we incurred financing fees of $40 and $121 with our Advisor for loan financing and refinancing activities, respectively. There were no financing fees owed to our Advisor as of September 30, 2014 and December 31, 2013.
Disposition Fees
During the first nine months of 2014 and 2013, we incurred disposition fees of $16 and $8, respectively, with our Advisor. See Note 20. There were no disposition fees owed to our Advisor as of September 30, 2014 and December 31, 2013, respectively.
31
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Development Fees
During the first nine months of 2014, we incurred $166 in development fees with our Advisor. During the first nine months of 2013, there were no development fees incurred with our Advisor. As of September 30, 2014, we owed our Advisor $17 for unpaid development fees as part of the 10% hold back.
Commissions
During the first nine months of 2014 and 2013, we incurred brokerage fees of $0 and $67, respectively, to a broker-dealer benefitting Larry O’Callaghan, a member of the Board of Trustees until June 2013. Brokerage fees were based on 8% of the purchase price of Sterling common shares sold and 4% of the purchase price of UPREIT units sold. As of September 30, 2014 and December 31, 2013, there were no outstanding brokerage fees owed to the broker-dealer.
During the first nine months of 2014 and 2013, we incurred real estate commissions of $606 and $921, 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 September 30, 2014 and December 31, 2013.
Rental Income
During the first nine months of 2014 and 2013, we received rental income of $134 and $134, respectively, under an operating lease agreement with GOLDMARK Property Management.
During the first nine months of 2014 and 2013, we received rental income of $39 and $28, respectively, under an operating lease agreement with GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc.
During the first nine months of 2014 and 2013, we received rental income of $32 and $31, respectively, under operating lease agreements with our Advisor.
Construction Costs
During the first nine months of 2014 and 2013, we incurred costs related to the construction of a 156 unit apartment community in Bismarck, North Dakota of $6,512 and $1,021 to GOLDMARK Development, respectively. As of September 30, 2014 and December 31, 2013, we owed GOLDMARK Development $427 and $102, respectively, for retainage. In addition as of September 30, 2014 and December 31, 2013 we owed GOLDMARK Development $976 and $365, respectively, for unpaid construction fees.
NOTE 17 - 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 $39,011 and $30,917 for the nine months ended September 30, 2014 and 2013, respectively.
Commercial properties are leased to tenants under terms expiring at various dates through 2034. Lease terms often include renewal options. For the nine months ended September 30, 2014 and 2013, gross revenues from commercial property rentals, including CAM income (common area maintenance) of $1,629 and $2,801, respectively, totaled $13,086 and $14,103, respectively.
32
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
NOTE 18 - PROPERTY management fees
We have entered into various property management agreements with unrelated management companies. The agreements provide for the payment of property management fees based on a percentage of rental income. During the nine months ended September 30, 2014 and 2013, we incurred property management fees of $55 and $75, respectively, to unrelated management companies.
During the nine month periods ended September 30, 2014 and 2013, we paid property management fees of $4,818 and $3,701, respectively, to GOLDMARK Property Management, a related party. The Company’s related party property management fees are further described in Note 16.
NOTE 19 - 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 20 – DISPOSITIONS
During the nine months ended September 30, 2014 the Company closed on the following property disposition:
On August 1, 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.
33
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
As previously disclosed in our 2013 Annual Report on Form 10-K, the operating partnership sold one senior living property and one parcel of vacant land for approximately $24,000 and $276, respectively. The operations of these properties as well as the gain on sale have been presented as income from discontinued operations in the accompanying consolidated statements of operations and other comprehensive income. Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation. The following is a summary of income from discontinued operations for the period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
Discontinued Operations |
||||||||
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
||||
|
|
(in thousands) |
|
(in thousands) |
||||||||
Income from rental operations |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate rental income |
|
$ |
— |
|
$ |
540 |
|
$ |
— |
|
$ |
1,620 |
Tenant reimbursements |
|
|
— |
|
|
68 |
|
|
— |
|
|
205 |
|
|
|
— |
|
|
608 |
|
|
— |
|
|
1,825 |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses from rental operations |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
— |
|
|
94 |
|
|
— |
|
|
297 |
Depreciation and amortization |
|
|
— |
|
|
181 |
|
|
— |
|
|
542 |
Real estate taxes |
|
|
— |
|
|
68 |
|
|
— |
|
|
206 |
|
|
|
— |
|
|
343 |
|
|
— |
|
|
1,045 |
Administration of REIT |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and disposition expenses |
|
|
— |
|
|
— |
|
|
— |
|
|
25 |
Total expenses |
|
|
— |
|
|
343 |
|
|
— |
|
|
1,070 |
Income from discontinued operations before gain on sale |
|
|
— |
|
|
265 |
|
|
— |
|
|
755 |
Gain on sale of discontinued operations |
|
|
— |
|
|
— |
|
|
— |
|
|
42 |
Gain from discontinued operations |
|
$ |
— |
|
$ |
265 |
|
$ |
— |
|
$ |
797 |
NOTE 21 – BUSINESS COMBINATIONS AND ACQUISITIONS
We continue to implement our strategy of acquiring properties in desired markets.
Purchases during the first nine months of 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
34
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
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 and 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.
In August 2014, the operating partnership purchased a 54 unit apartment complex in Fargo, North Dakota for approximately $2,646. The purchase was financed with the combination of the issuance of limited partnership units valued at approximately $1,760 and cash. The interest was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $488 and $169, respectively.
The following table summarizes the fair value of the assets acquired and liabilities assumed during the nine months ended September 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 |
Dakota Manor Apartments, Fargo, ND |
|
|
2,646 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,646 |
|
|
$ |
22,924 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(1,580) |
|
$ |
21,344 |
(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 September 30, 2014 was completed through issuing approximately 1,146,000 limited partnership units of the operating partnership valued at $14.00 per unit and $15.00 per unit for an aggregate consideration of approximately $16,156, assumed loans of $1,580, assumed liabilities and deferred maintenance of $202 and cash of $4,986. 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.
35
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Purchases during the first nine months of 2013
In January 2013, the operating partnership purchased a 38,932 square foot implement dealership in Redwood Falls, Minnesota for approximately $4,658. The purchase was financed with a combination of a $1,800 loan, the issuance of limited partnership units valued at approximately $2,633 and cash.
In February 2013, the operating partnership purchased a 42 unit apartment complex in Fargo, North Dakota for approximately $2,310. The purchase was financed with the issuance of limited partnership units valued at approximately $2,310. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $499.
In February 2013, the operating partnership purchased a 20 unit apartment complex in Fargo, North Dakota for approximately $740. The purchase was financed with the issuance of limited partnership units valued at approximately $740. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $129.
In February 2013, the operating partnership purchased a 12 unit apartment complex in Fargo, North Dakota for approximately $714. The purchase was financed with the combination of a $263 loan and the issuance of limited partnership units valued at approximately $471. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $100.
In February 2013, the operating partnership purchased a 30 unit apartment complex in Fargo, North Dakota for approximately $957. The purchase was financed with the combination of a $238 loan and the issuance of limited partnership units valued at approximately $751. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $229.
In February 2013, the operating partnership purchased a 39 unit apartment complex in Fargo, North Dakota for approximately $1,036. The purchase was financed with the issuance of limited partnership units valued at approximately $985 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received cash of $51 and limited partnership units valued at approximately $389, respectively.
In February 2013, the operating partnership purchased a 15 unit apartment complex in Fargo, North Dakota for approximately $550. The purchase was financed with the issuance of limited partnership units valued at approximately $481 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $69 and limited partnership units valued at approximately $110.
In February 2013, the operating partnership purchased a 25 unit apartment complex in Fargo, North Dakota for approximately $950. The purchase was financed with the combination of a $210 loan and the issuance of limited partnership units valued at approximately $772. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $43 and limited partnership units valued at approximately $236.
In February 2013, the operating partnership purchased a 96 unit apartment complex in Grand Forks, North Dakota for approximately $4,416. The purchase was financed with the issuance of limited partnership units valued at approximately $4,416. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $828.
In May 2013, the operating partnership purchased a 132 unit apartment complex in Anoka, Minnesota for approximately $11,500. The purchase was financed with the issuance of limited partnership units valued at approximately $299 and cash.
36
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
In June 2013, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $756. The purchase was financed with the issuance of limited partnership units valued at approximately $678 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $151.
In June 2013, the operating partnership purchased a 12 unit apartment complex in Bismarck, North Dakota for approximately $636. The purchase was financed with the issuance of limited partnership units valued at approximately $636. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $159.
In June 2013, the operating partnership purchased a 59 unit apartment complex in Fargo, North Dakota for approximately $3,127. The purchase was financed with the issuance of limited partnership units valued at approximately $2,383 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $691 and $627, respectively.
In September 2013, the operating partnership purchased a 151 unit apartment complex in St. Louis Park, Minnesota for approximately $8,758. The purchase was financed with a combination of a $4,500 loan, the issuance of limited partnership units valued at approximately $5,398 and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland, and Furness, related parties, who received limited partnership units valued at approximately $1,340, $973 and $239, respectively.
The following table summarizes the fair value of the assets acquired and liabilities assumed during the nine months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and |
|
In Place |
|
Favorable |
|
Unfavorable |
|
Mortgages |
|
Consideration |
||||||
|
|
Equipment |
|
Leases |
|
Lease Terms |
|
Lease Terms |
|
Assumed |
|
Given |
||||||
|
|
(in thousands) |
||||||||||||||||
Titan Machinery, Redwood Falls, MN |
|
$ |
3,902 |
|
$ |
745 |
|
$ |
11 |
|
$ |
— |
|
$ |
— |
|
$ |
4,658 |
44th Street, Fargo, ND |
|
|
2,310 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,310 |
Forest Avenue, Fargo, ND |
|
|
740 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
740 |
Kennedy, Fargo, ND |
|
|
714 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
714 |
Pacific Park I, Fargo, ND |
|
|
957 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
957 |
Pacific Park II, Fargo, ND |
|
|
1,036 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,036 |
Pacific Park South, Fargo, ND |
|
|
550 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
550 |
Spring, Fargo, ND |
|
|
950 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
950 |
Stanford Court, Grand Forks, ND |
|
|
4,416 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,416 |
Dellwood Estates, Anoka, MN |
|
|
11,500 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
11,500 |
Arbor Apartments, Bismarck, ND |
|
|
636 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
636 |
Granger Court I, Fargo, ND |
|
|
3,127 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,127 |
Schrock Apartments, Fargo, ND |
|
|
756 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
756 |
Courtyard Apartments, St. Louis Park, MN |
|
|
8,758 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
8,758 |
|
|
$ |
40,352 |
|
$ |
745 |
|
$ |
11 |
|
$ |
— |
|
$ |
— |
|
$ |
41,108 |
Total consideration given for acquisitions through September 30, 2013 was completed through issuing approximately 1,794,000 limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $22,953, a new loan of $4,500 and cash of $13,655. 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.
37
STERLING REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014 AND 2013 (UNAUDITED)
(Dollar amounts in thousands, except share and per share data)
Estimated Value of Units/Shares
The Board of Trustees has determined an estimate of fair value for the trust shares issued in the first nine months of 2014 and 2013. 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 nine months of 2014 and 2013. 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 shares/unit for the first three months of 2014 through March 27, 2014 and the first nine months of 2013. The Board determined the fair value of the shares and limited partnership units to be $15.00 per share/unit effective March 28, 2014.
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 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 22 - SUBSEQUENT EVENTS
On October 15, 2014, we paid a dividend or distribution of $0.2250 per share on our common shares of beneficial interest, to common shareholders and limited unit holders of record on September 30, 2014.
In October 2014, the operating partnership purchased an 80 unit apartment complex in Hutchinson, Minnesota for approximately $4,320. The purchase price was financed with the issuance of limited partnership units, an assumed loan and cash.
In October 2014, the operating partnership purchased 16 acres of development land in Bismarck, North Dakota adjacent to development currently in the construction phase for approximately $2,246 with cash.
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.
38
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 27.6% of the operating partnership as of September 30, 2014. 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 (f/k/a INREIT 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 September 30, 2014, approximately 66.1% of our properties were apartment communities located primarily in North Dakota with others located in Minnesota and Nebraska. Most multi-family properties are leased to a variety of tenants under short‑term leases.
As of September 30, 2014, approximately 33.9% 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, Nebraska, Texas and Wisconsin. We have both single and multi-tenant properties in the commercial portfolio, most of which are under long-term leases.
39
Our real estate portfolio consisted of 130 properties containing approximately 6,449 apartments and 1,369,000 square feet of leasable commercial space as of September 30, 2014. The portfolio has a net book value of approximately $422,113, which includes construction in progress, and book equity, including noncontrolling interests, of approximately $152,311 as of September 30, 2014.
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 nine month period ended September 30, 2014 included elsewhere in this report.
Specific Achievements
· |
Increased revenues from rental operations by $7,077 or 15.7% for the nine months ended September 30, 2014, compared to same nine month period in 2013. |
· |
Acquired eight (8) properties totaling 610 residential apartment units for a total of $22,924 during the nine months ended September 30, 2014. |
· |
Declared and paid dividends totaling $0.6750 per common share for first, second and third quarters of 2014. |
40
Results of Operations for the Three Months Ended September 30, 2014 and 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September, 2014 |
|
Three months ended September, 2013 |
||||||||||||||
|
|
Residential |
|
Commercial |
|
Total |
|
Residential |
|
Commercial |
|
Total |
||||||
|
|
(unaudited) |
|
(unaudited) |
||||||||||||||
|
|
(in thousands) |
|
(in thousands) |
||||||||||||||
Real Estate Revenues |
|
$ |
13,485 |
|
$ |
4,266 |
|
$ |
17,751 |
|
$ |
10,766 |
|
$ |
4,722 |
|
$ |
15,488 |
Real Estate Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Taxes |
|
|
1,066 |
|
|
238 |
|
|
1,304 |
|
|
1,053 |
|
|
644 |
|
|
1,697 |
Property Management Fees |
|
|
1,634 |
|
|
71 |
|
|
1,705 |
|
|
1,256 |
|
|
86 |
|
|
1,342 |
Utilities |
|
|
959 |
|
|
209 |
|
|
1,168 |
|
|
728 |
|
|
239 |
|
|
967 |
Repairs and Maintenance |
|
|
3,136 |
|
|
227 |
|
|
3,363 |
|
|
1,596 |
|
|
192 |
|
|
1,788 |
Insurance |
|
|
407 |
|
|
12 |
|
|
419 |
|
|
339 |
|
|
20 |
|
|
359 |
Total Real Estate Expenses |
|
|
7,202 |
|
|
757 |
|
|
7,959 |
|
|
4,972 |
|
|
1,181 |
|
|
6,153 |
Net Operating Income |
|
$ |
6,283 |
|
$ |
3,509 |
|
$ |
9,792 |
|
$ |
5,794 |
|
$ |
3,541 |
|
$ |
9,335 |
Interest |
|
|
|
|
|
|
|
|
3,051 |
|
|
|
|
|
|
|
|
2,683 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
3,485 |
|
|
|
|
|
|
|
|
3,047 |
Administration of REIT |
|
|
|
|
|
|
|
|
977 |
|
|
|
|
|
|
|
|
1,157 |
Loss on impairment of property |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
226 |
Other (income)/expense |
|
|
|
|
|
|
|
|
(400) |
|
|
|
|
|
|
|
|
(267) |
Income from continuing operations |
|
|
|
|
|
|
|
|
2,679 |
|
|
|
|
|
|
|
|
2,489 |
Discontinued operations |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
265 |
Net Income |
|
|
|
|
|
|
|
$ |
2,679 |
|
|
|
|
|
|
|
$ |
2,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributed to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest |
|
|
|
|
|
|
|
$ |
1,944 |
|
|
|
|
|
|
|
$ |
1,917 |
Sterling Real Estate Trust |
|
|
|
|
|
|
|
$ |
735 |
|
|
|
|
|
|
|
$ |
837 |
Dividends per share (1) |
|
|
|
|
|
|
|
$ |
0.2250 |
|
|
|
|
|
|
|
$ |
0.2100 |
Earnings per share |
|
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
|
|
$ |
0.16 |
Weighted average number of common shares |
|
|
|
|
|
|
|
|
5,517 |
|
|
|
|
|
|
|
|
5,405 |
(1) |
Does not take into consideration the amounts distributed by the operating partnership to limited partners. |
Revenues
Property revenues of approximately $17,751 for the three months ended September 30, 2014 increased approximately $2,263 or 14.6% in comparison to the same period in 2013. Residential property revenues increased approximately $2,719 while commercial property revenues decreased approximately $456.
The following table illustrates quarterly changes in occupancy for the periods indicated:
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
|
2014 |
|
2013 |
|
Residential occupancy |
|
95.6 |
% |
|
97.2 |
Commercial occupancy |
|
98.4 |
% |
|
99.2 |
Residential revenues for the three month period ended September 30, 2014 increased $2,719 in comparison to the same period for 2013. Approximately $2,397 of the increase was due to residential properties acquired since January 1, 2013. Rental income from residential properties owned for more than one year increased approximately $322 in comparison to the same period in 2013. Residential revenues comprised 76.0% of total revenues for the three month period ended September 30, 2014 compared to 69.5% of total revenues for the three month period ended September 30, 2013. The residential occupancy rates for the three months ended September 30, 2014 decreased 1.6% primarily due to the number of new apartments available in the Midwest market in recent months and the onboarding of the first building placed in service of the Bismarck, North Dakota development project.
41
For the three month period ended September 30, 2014 total commercial revenues decreased $456 in comparison to the same period for 2013. The overall decrease includes an increase in revenues of approximately $115 from commercial properties acquired since January 1, 2013. Rental income from commercial properties owned for more than one year decreased approximately $571 in comparison to the same period in 2013 primarily due to decreased CAM income (common area maintenance) and tenant turnover at an office property in Duluth, Minnesota. Commercial revenues comprised 24.0% of the total revenues for the three month period ended September 30, 2014 compared to 30.5% of total revenues for the three month period ended September 30, 2013.
Expenses
Residential expenses from operations of $7,202 during the three month period ended September 30, 2014 increased $2,230 or 44.9% in comparison to the same period in 2013. This increase was primarily attributed to the increase in number of residential properties owned during the three month period ended September 30, 2014 versus the same period in 2013. In addition, increased repair and maintenance expenses reflect the investments made to position these properties for continued rate increases, tenant retention, and market competiveness.
Commercial expenses from operations of $757 during the three month period ended September 30, 2014 decreased $424 or 35.9% in comparison to the same period in 2013. The decrease was in part attributed to decreases in real estate tax expense on our North Dakota properties due to tax relief and a decrease that corresponds to the reduction in commercial CAM income.
Interest expense of $3,051 during the three month period ended September 30, 2014 increased $368 in comparison to the same period in 2013. Interest expense was approximately 17.2% and 17.3% of rental income for the three month period ended September 30, 2014 and 2013, respectively.
Depreciation and amortization expense increased 14.4% from $3,047 for the three months ended September 30, 2013 to approximately $3,485 for the three months ended September 30, 2014. The $438 increase was primarily a result of depreciation and amortization for the 15 properties added to our portfolio since September 30, 2013. Depreciation and amortization expense as a percentage of rental income for the three month periods ended September 30, 2014 and 2013 was relatively consistent at 19.6% and 19.7%, respectively.
REIT administration expenses decreased from $1,157 for the three months ended September 30, 2013 to $977 for the three month periods ended September 30, 2014 due to a decrease in acquisition expenses related to acquisition activity in comparison to the same period in 2013.
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 $489 or 8.4% for the three month period ended September 30, 2014 in comparison to the same three month period in 2013 due primarily to acquisition activity in the residential segment. Commercial NOI decreased $32 or 0.9% for the three month period ended September 30, 2014 in comparison to the same three month period in 2013 due primarily to a scheduled step rent decrease related to tenant improvements, and tenant turnover at an office property in Duluth, Minnesota.
42
Net Income
Net income for the three months ended September 30, 2014 was $2,679 compared to $2,754 for the three months ended September 30, 2013. Our net income was negatively impacted by the sale of the senior living property in October 2013 and increased repairs and maintenance expenses, which were partially offset by increased operating revenues.
Results of Operations for the Nine Months Ended September 30, 2014 and 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September, 2014 |
|
Nine months ended September, 2013 |
||||||||||||||
|
|
Residential |
|
Commercial |
|
Total |
|
Residential |
|
Commercial |
|
Total |
||||||
|
|
(unaudited) |
|
(unaudited) |
||||||||||||||
|
|
(in thousands) |
|
(in thousands) |
||||||||||||||
Real Estate Revenues |
|
$ |
39,011 |
|
$ |
13,086 |
|
$ |
52,097 |
|
$ |
30,917 |
|
$ |
14,103 |
|
$ |
45,020 |
Real Estate Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Taxes |
|
|
3,152 |
|
|
728 |
|
|
3,880 |
|
|
2,981 |
|
|
1,940 |
|
|
4,921 |
Property Management Fees |
|
|
4,653 |
|
|
220 |
|
|
4,873 |
|
|
3,546 |
|
|
230 |
|
|
3,776 |
Utilities |
|
|
3,629 |
|
|
656 |
|
|
4,285 |
|
|
2,589 |
|
|
650 |
|
|
3,239 |
Repairs and Maintenance |
|
|
7,752 |
|
|
636 |
|
|
8,388 |
|
|
4,094 |
|
|
594 |
|
|
4,688 |
Insurance |
|
|
1,178 |
|
|
41 |
|
|
1,219 |
|
|
810 |
|
|
48 |
|
|
858 |
Total Real Estate Expenses |
|
|
20,364 |
|
|
2,281 |
|
|
22,645 |
|
|
14,020 |
|
|
3,462 |
|
|
17,482 |
Net Operating Income |
|
$ |
18,647 |
|
$ |
10,805 |
|
$ |
29,452 |
|
$ |
16,897 |
|
$ |
10,641 |
|
$ |
27,538 |
Interest |
|
|
|
|
|
|
|
|
9,197 |
|
|
|
|
|
|
|
|
8,036 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
10,216 |
|
|
|
|
|
|
|
|
8,848 |
Administration of REIT |
|
|
|
|
|
|
|
|
3,331 |
|
|
|
|
|
|
|
|
3,926 |
Loss on lease terminations |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
Loss on impairment of property |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
226 |
Other (income)/expense |
|
|
|
|
|
|
|
|
(1,632) |
|
|
|
|
|
|
|
|
(642) |
Income from continuing operations |
|
|
|
|
|
|
|
|
8,340 |
|
|
|
|
|
|
|
|
7,144 |
Discontinued operations |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
797 |
Net Income |
|
|
|
|
|
|
|
$ |
8,340 |
|
|
|
|
|
|
|
$ |
7,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributed to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest |
|
|
|
|
|
|
|
$ |
6,028 |
|
|
|
|
|
|
|
$ |
5,523 |
Sterling Real Estate Trust |
|
|
|
|
|
|
|
$ |
2,312 |
|
|
|
|
|
|
|
$ |
2,418 |
Dividends per share (1) |
|
|
|
|
|
|
|
$ |
0.6750 |
|
|
|
|
|
|
|
$ |
0.6300 |
Earnings per share |
|
|
|
|
|
|
|
$ |
0.42 |
|
|
|
|
|
|
|
$ |
0.45 |
Weighted average number of common shares |
|
|
|
|
|
|
|
|
5,467 |
|
|
|
|
|
|
|
|
5,358 |
(1) |
Does not take into consideration the amounts distributed by the operating partnership to limited partners. |
Revenues
Property revenues of approximately $52,097 for the nine months ended September 30, 2014 increased approximately $7,077 or 15.7% in comparison to the same period in 2013. Residential property revenues increased approximately $8,094 while commercial property revenues decreased approximately $1,017.
The following table illustrates changes in occupancy for the nine month periods indicated:
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
|
2014 |
|
2013 |
|
Residential occupancy |
|
96.6 |
% |
|
97.7 |
Commercial occupancy |
|
98.8 |
% |
|
99.2 |
Residential revenues for the nine month period ended September 30, 2014 increased $8,094 in comparison to the same period for 2013. Approximately $7,307 of the increase was due to residential properties acquired since January 1,
43
2013. Rental income from residential properties owned for more than one year increased approximately $787 in comparison to the same period in 2013. Residential revenues comprised 74.9% of total revenues for the nine month period ended September 30, 2014 compared to 68.7% of total revenues for the nine month period ended September 30, 2013. The residential occupancy rates for the nine months ended September 30, 2014 decreased 1.1% primarily due to the number of new apartments available in the Midwest market recent months.
For the nine month period ended September 30, 2014 commercial revenues decreased $1,017 in comparison to the same period for 2013. The decrease is despite an increase in revenues of approximately $380 from commercial properties acquired since January 1, 2013. Rental income from commercial properties owned for more than one year decreased approximately $1,397 in comparison to the same period in 2013 primarily due to decreased CAM income (common area maintenance) and tenant turnover at an office property in Duluth, Minnesota. Commercial revenues comprised 25.1% of the total revenues for the nine month period ended September 30, 2014 compared to 31.3% of total revenues for the nine month period ended September 30, 2013.
Expenses
Residential expenses from operations of $20,364 during the nine month period ended September 30, 2014 increased $6,344 or 45.2% in comparison to the same period in 2013. This increase was primarily attributed to the increase in number of residential properties owned during the nine month period ended September 30, 2014 versus the same period in 2013. In addition, increased repair and maintenance expenses reflect the investments made to position these properties for continued rate increases, tenant retention, and market competiveness.
Commercial expenses from operations of $2,281 during the nine month period ended September 30, 2014 decreased $1,181 or 34.1% in comparison to the same period in 2013. The decrease was in part attributed to decreases in real estate tax expense on our North Dakota properties due to tax relief and a decrease that corresponds to the reduction in commercial CAM income.
Interest expense of $9,197 during the nine month period ended September 30, 2014 increased $1,161 in comparison to the same period in 2013. Interest expense was approximately 17.7% and 17.8% of rental income for the nine month periods ended September 30, 2014 and 2013, respectively. The decrease of interest expense as a percentage of rental income during the nine month period ended September 30, 2014 was a result of lower interest rates for mortgage notes payable during this period in 2014 compared to the same period in 2013 and increased rental revenues from acquired properties unencumbered by mortgages.
Depreciation and amortization expense increased 15.5% from $8,848 for the nine months ended September 30, 2013 to approximately $10,216 for the nine months ended September 30, 2014. The $1,368 increase was primarily a result of depreciation and amortization for the 15 properties added to our portfolio since September 30, 2013. Depreciation and amortization expense as a percentage of rental income for the nine month periods ended September 30, 2014 and 2013 was consistent at 19.6% and 19.7%, respectively.
REIT administration expenses decreased from $3,926 for the nine months ended September 30, 2013 to $3,331 for the nine month period ended September 30, 2014 due to a decrease in acquisition expenses related to less acquisition activity during the three quarters of 2014 in comparison to the same period in 2013.
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.
44
Residential NOI increased $1,750 or 10.4% for the nine month period ended September 30, 2014 in comparison to the same nine month period in 2013 due primarily to acquisition activity in the residential segment. Commercial NOI increased $164 or 1.5% for the nine month period ended September 30, 2014 in comparison with the same nine month period in 2013 due primarily to lower real estate tax expense in the commercial segment.
Net Income
Net income for the nine months ended September 30, 2014 was $8,340 compared to $7,941 for the nine months ended September 30, 2013. The increase was primarily due to higher residential operating revenues and lower real estate tax expense, all partially offset by the sale of the senior living property in October 2013 and increased repair and maintenance expenses, all as described above.
Property Acquisitions and Dispositions
Property Acquisitions and Dispositions during the nine month period ended September 30, 2014
We acquired eight properties for a total of $22,924 during the first nine months of 2014. Total consideration for the acquisitions was the issuance of approximately $16,156 in limited partnership units of the operating partnership, assumed loans of $1,580, assumed liabilities and deferred maintenance of $202 and cash of $4,986.
During the third quarter of 2014, the operating partnership sold a 14,736 square foot office property in Norfolk, Nebraska for proceeds of approximately $625 and recognized a gain of approximately $69.
Property Acquisitions and Dispositions during the nine month period ended September 30, 2013
We acquired fourteen properties for a total of $41,108 during the first nine months of 2013. Total consideration for the acquisitions was the issuance of approximately $22,953 in limited partnership units of the operating partnership, a new loan of $4,500 and cash of $13,655.
During the second quarter of 2013, we sold a parcel of land for a total of $276 and recognized a $42 gain on the sale.
See Notes 20 and 21 to the Consolidated Financial Statements included above for more information regarding our acquisitions and dispositions during the nine month periods ended September 30, 2014 and 2013.
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 it 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.
45
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.
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 this 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.
46
The following tables include calculations of FFO and MFFO, and the reconciliations to net income, for the three and nine months ended September 30, 2014 and 2013, 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 September, 2014 |
|
Three months ended September, 2013 |
||||||||||||
|
|
|
|
|
|
|
Per |
|
|
|
|
|
|
Per |
||
|
|
|
|
|
Weighted Avg |
|
Share and |
|
|
|
|
Weighted Avg |
|
Share and |
||
|
|
Amount |
|
Shares and Units(1) |
|
Unit (2) |
|
Amount |
|
Shares and Units(1) |
|
Unit (2) |
||||
|
|
(unaudited) |
||||||||||||||
|
|
(in thousands, except per share data) |
||||||||||||||
Net Income attributable to Sterling Real Estate Trust |
|
$ |
735 |
|
5,517 |
|
$ |
0.13 |
|
$ |
837 |
|
5,405 |
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest - OPU |
|
|
1,944 |
|
14,557 |
|
|
|
|
|
1,926 |
|
12,558 |
|
|
|
Depreciation & Amortization from continuing operations |
|
|
3,485 |
|
|
|
|
|
|
|
3,047 |
|
|
|
|
|
Depreciation & Amortization from discontinued operations |
|
|
— |
|
|
|
|
|
|
|
181 |
|
|
|
|
|
Pro rata share of unconsolidated affiliate depreciation & amortization |
|
|
121 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
Loss on impairment of property |
|
|
— |
|
|
|
|
|
|
|
226 |
|
|
|
|
|
Subtract: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) loss on land and depreciable asset sales |
|
|
(69) |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Funds from operations applicable to common shares and limited partnership units |
|
|
6,216 |
|
20,074 |
|
$ |
0.31 |
|
|
6,338 |
|
17,963 |
|
$ |
0.35 |
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and disposition expenses |
|
|
194 |
|
|
|
|
|
|
|
620 |
|
|
|
|
|
Modified Funds from Operations (MFFO) |
|
$ |
6,410 |
|
20,074 |
|
$ |
0.32 |
|
$ |
6,958 |
|
17,963 |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Please see Note 12 to the consolidated financial statements included above for more information. |
(2) |
Net Income is calculated on a per share basis. FFO is calculated on a per share and unit basis. |
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September, 2014 |
|
|
Nine months ended September, 2013 |
|||||||||||
|
|
|
|
|
|
|
Per |
|
|
|
|
|
|
Per |
||
|
|
|
|
|
Weighted Avg |
|
Share and |
|
|
|
|
Weighted Avg |
|
Share and |
||
|
|
Amount |
|
Shares and Units(1) |
|
Unit (2) |
|
Amount |
|
Shares and Units(1) |
|
Unit (2) |
||||
|
|
(unaudited) |
||||||||||||||
|
|
(in thousands, except per share data) |
||||||||||||||
Net Income attributable to Sterling Real Estate Trust |
|
$ |
2,312 |
|
5,467 |
|
$ |
0.42 |
|
$ |
2,418 |
|
5,358 |
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest - OPU |
|
|
6,019 |
|
14,186 |
|
|
|
|
|
5,515 |
|
12,183 |
|
|
|
Depreciation & Amortization from continuing operations |
|
|
10,216 |
|
|
|
|
|
|
|
8,848 |
|
|
|
|
|
Depreciation & Amortization from discontinued operations |
|
|
— |
|
|
|
|
|
|
|
542 |
|
|
|
|
|
Pro rata share of unconsolidated affiliate depreciation & amortization |
|
|
364 |
|
|
|
|
|
|
|
324 |
|
|
|
|
|
Loss on impairment of property |
|
|
— |
|
|
|
|
|
|
|
226 |
|
|
|
|
|
Subtract: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) loss on land and depreciable asset sales |
|
|
(69) |
|
|
|
|
|
|
|
(42) |
|
|
|
|
|
Funds from operations applicable to common shares and limited partnership units |
|
|
18,842 |
|
19,653 |
|
$ |
0.96 |
|
|
17,831 |
|
17,541 |
|
$ |
1.02 |
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and disposition expenses |
|
|
1,244 |
|
|
|
|
|
|
|
2,207 |
|
|
|
|
|
Modified Funds from operations (MFFO) |
|
$ |
20,086 |
|
19,653 |
|
$ |
1.02 |
|
$ |
20,038 |
|
17,541 |
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Please see Note 12 to the consolidated financial statements included above for more information. |
(2) |
Net Income is calculated on a per share basis. FFO is 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 and repurchases, and (iv) payment of principal and interest on current and any future outstanding indebtedness. 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.
48
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 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.
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2014 |
|
2013 |
||
|
|
(in thousands) |
||||
Net cash flows provided by operating activities |
|
$ |
13,549 |
|
$ |
16,313 |
Net cash flows used in investing activities |
|
$ |
(12,127) |
|
$ |
(19,892) |
Net cash flows provided by (used in) financing activities |
|
$ |
(5,637) |
|
$ |
2,625 |
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 and development fees.
Net cash provided by operating activities was $13,549 and $16,313 for the nine months ended September 30, 2014 and 2013, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization. The funds generated for the nine months ended September 30, 2014 and 2013 were primarily from property operations of our real estate portfolio. In addition during the nine months ended September 30, 2014, we invested $7,219 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 real estate tax and insurance escrows.
49
Net cash used in investing activities was $12,127 and $19,892 for the nine months ended September 30, 2014 and 2013, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the nine months ended September 30, 2014 and 2013, cash flows used in investing activities related primarily to the acquisition of properties and capital expenditures was $12,172 and $17,044, respectively, and the change in restricted cash for real estate tax, insurance and replacement reserve escrows was $602 and $3,939, respectively. In addition, during the nine months ended September 30, 2014, we loaned $600 to a non-affiliated entity.
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 $5,637 for the nine months ended September 30, 2014. Net cash provided by financing activities was $2,625 for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we paid approximately $10,450 in dividends and distributions, redeemed $4,187 of shares and units, received proceeds from new mortgage notes payable of approximately $13,908, and made mortgage principal payments of approximately $5,833. For the nine months ended September 30, 2013, we paid approximately $8,850 in dividends and distributions, redeemed $3,078 of shares and units, received proceeds from new mortgage notes payable of approximately $29,054, and made mortgage principal payments of approximately $14,838.
Dividends
Common Stock
We declared cash dividends to our shareholders during the period from January 1, 2014 to September 30, 2014 totaling $3,683 or $0.6750 per share, including amounts reinvested through the dividend reinvestment plan. During the nine months ended September 30, 2014, we paid cash dividends of $1,196 and dividends of $2,487 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $13,549 from our cash flows from operations and $1,081 provided by distributions from unconsolidated affiliates.
We declared cash dividends to our shareholders during the period from January 1, 2013 to September 30, 2013 totaling $3,369 or $0.6300 per share, including amounts reinvested through the dividend reinvestment plan. During the nine months ended September 30, 2013, we paid cash dividends of $1,322 and dividends of $2,047 were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $16,313 from our cash flows from operations and $849 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.
50
The following table presents certain information regarding our dividend coverage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2014 |
|
2013 |
||
|
|
(in thousands) |
||||
Cash flows provided by operations (includes net income of $8,340 and $7,941, respectively) |
|
$ |
13,549 |
|
$ |
16,313 |
Distributions from unconsolidated affiliates |
|
|
1,081 |
|
|
849 |
Gain on sales of properties |
|
|
69 |
|
|
37 |
Dividends declared |
|
|
(3,683) |
|
|
(3,369) |
Excess |
|
$ |
11,016 |
|
$ |
13,830 |
Limited Partnership Units
The operating partnership agreement provides that our operating partnership will distribute to the partners (subject to certain limitations) cash from operations on a quarterly basis (or more frequently, if we so elect) in accordance with the percentage interests of the partners. We determine the amounts of such distributions in our sole discretion.
For the nine months ended September 30, 2014, we declared and paid distributions of $9,664 to holders of limited partnership units in our operating partnership. Distributions were paid at a rate of $0.6750 per unit, which is equal to the per share distribution rate paid to the common shareholders. As of September 30, 2014, the limited partnership declared distributions of $3,277 which represented distributions for the quarter ended September 30, 2014, and we paid such amount on October 15, 2014.
For the nine months ended September 30, 2013, we declared and paid distributions of $7,814 to holders of limited partnership units in our operating partnership. Distributions were paid at a rate of $0.6300 per unit, which is equal to the per share distribution rate paid to the common shareholders. As of September 30, 2013, the limited partnership declared distributions of $2,689 which represented distributions for the quarter ended September 30, 2013, and we paid such amount on October 15, 2013.
Sources of Dividends
For the nine months ended September 30, 2014, we paid aggregate dividends of $3,683, which were paid 100% from cash flows provided by operating activities. Our funds from operations, or FFO, was $18,842 while our modified funds from operations, or MFFO, for the nine months ended September 30, 2014 was $20,086; therefore our management believes our distribution policy is sustainable over time. For the nine months ended September 30, 2013, we paid aggregate dividends of $3,369 which were paid 100% from cash flows provided by operating activities. Our FFO was $17,831 while our MFFO, as of the nine months ended September 30, 2013 was $20,038. 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 September 30, 2014, our cash resources consisted of cash and cash equivalents totaling approximately $9,634. In addition, we had unencumbered properties with a gross book value of $49,910, which could potentially be used as collateral to secure additional financing in future periods. We also had marketable securities totaling approximately $7,682, which could be used for operations or acquisitions in future periods.
We have a $15,000 variable rate (1-month LIBOR plus 2.35%) line of credit agreement with Wells Fargo Bank, which expires in July 2015; a $3,000 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expired November 1, 2014; and a $2,660 variable rate (prime rate less 0.25%) line of credit agreement with Bell State Bank & Trust, which expires in April 2015. The lines of credit are secured by properties in Duluth, Minnesota; St. Cloud, Minnesota; Minneapolis/St. Paul, Minnesota, Moorhead, Minnesota, Fargo, North Dakota, Mandan, North Dakota, and Austin, Texas, respectively. We also have a $1,000 variable rate (the greater of the prime rate or 3.25%) unsecured line of
51
credit agreement with Bremer Bank, which expired October 31, 2014. At September 30, 2014 and December 31, 2013, there was no balance outstanding on the lines of credit, leaving $21,000 unused under the agreements. The line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of September 30, 2014 and December 31, 2013, we were in compliance with all covenants.
Subsequent to September 30, 2014 the $3,000 variable rate line of credit with Bremer Bank was extended to January 31, 2015 while negotiations are ongoing to renew the line. It is anticipated that this line will be increased to $4,000 with a variable interest rate equal to the prime rate less 0.5%. In addition, the $1,000 unsecured line of credit with Bremer Bank was increased to $2,000 with a variable interest rate equal to the prime rate less 0.5% maturing October 31, 2015.
In connection with our construction in progress, the Company anticipates obtaining an additional $12,000 line of credit. We presently expect the terms of the line of credit to be for 24 months with a variable interest rate based on 1-month LIBOR plus 2.5%, then subsequent to the initial period, rolling into a 5 year amortizing loan. The line will be used as needed to fund the construction of the residential project currently in process.
Our cash resources can be used for working capital needs and other commitments. Our lines of credit and certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of September 30, 2014 and December 31, 2013 we were in compliance with all covenants.
The issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the nine months ended September 30, 2014, we did not sell any common shares in private placements. During the nine months ended September 30, 2014, we issued 172,000 and 91,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively and raised gross proceeds of $3,722. During the nine months ended September 30, 2013, we did not sell any common shares in private placements. During the nine months ended September 30, 2013, we issued 153,000 and 56,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share repurchases, respectively and raised gross proceeds of $2,823.
During the nine months ended September 30, 2014, we issued limited partnership units valued at approximately $16,156 in connection with the acquisition of eight properties.
During the nine months ended September 30, 2013, we issued limited partnership units valued at approximately $22,953 in connection with the acquisitions of fourteen properties.
Off-Balance Sheet Arrangements
As of September 30, 2014 and December 31, 2013, 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 September 30, 2014, 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.
52
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the third fiscal quarter of 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
53
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sale of Securities
Neither Sterling nor the operating partnership issued any unregistered securities during the three month period ended September 30, 2014, except as described below:
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, as set forth in the table below, during the three month period ended September 30, 2014 (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 |
|
Dakota Manor Apartments, Fargo, ND |
|
08/07/14 |
|
117,317 |
|
|
1,760 |
On July 28, 2014, the Company issued 1,560 shares to independent trustees pursuant to the Trustee Compensation Plan pursuant to Section 4(2) and Rule 506 of Regulation D.
Other Sales
During the three months ended September 30, 2014, we issued 45,119 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. The issuances during the three months ended September 30, 2014 were as set forth below:
|
|
|
|
|
Total Number of |
|
|
Common Shares |
Period |
|
Exchanged |
July 1-31, 2014 |
|
1,000 |
August 1-31, 2014 |
|
— |
September 1-30, 2014 |
|
44,119 |
|
|
45,119 |
Redemptions of Securities
Set forth below is information regarding common shares and limited partnership units redeemed during the three months ended September 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or |
|
|
|
|
|
|
|
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 |
|
the Plans or Programs |
||
July 1-31, 2014 |
|
10,000 |
|
4,000 |
|
$ |
14.00 |
|
800,000 |
|
482,000 |
|
$ |
13,217,000 |
August 1-31, 2014 |
|
5,000 |
|
7,000 |
|
$ |
14.00 |
|
805,000 |
|
489,000 |
|
$ |
13,038,000 |
September 1-30, 2014 |
|
— |
|
— |
|
$ |
14.00 |
|
805,000 |
|
489,000 |
|
$ |
— |
Total |
|
15,000 |
|
11,000 |
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2014, we redeemed all shares or units for which we received redemption requests. In addition, for the three months ended September 30, 2014, all common shares and units redeemed were redeemed as part of the publicly announced plans.
54
On March 28, 2013, September 26, 2013 and March 27, 2014 our Board of Trustees revised the Share Redemption Plan and Unit Redemption Plan. The amended and restated Share Redemption Plan and Unit Redemption Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by members 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 redemption price for such shares and units redeemed under the plan was fixed at $13.00 per share or unit, which was increased to $14.00 effective October 16, 2013 and is the current redemption price. The redemption plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plans at any time in its sole discretion.
55
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 September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statement of Shareholders’ Equity for nine months ended September 30, 2014; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and; (v) Notes to Consolidated Financial Statements. |
56
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated:November 13, 2014
|
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) |
57