Results
Sterling Real Estate Trust
11/05/2025 | Press release | Distributed by Public on 11/05/2025 12:34
Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)
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 included in this Quarterly Report on Form 10-Q and the documents incorporated into this document by reference contain certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements include statements regarding our plans and objectives, including, among other things, our future financial condition, anticipated capital expenditures, anticipated dividends and other matters. Forward-looking statements are typically identified by the use of terms such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.
The forward-looking statements included herein are based on our current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure readers that the forward-looking statements included in this filing will prove to be accurate. The accompanying information contained in this Quarterly Report on Form 10-Q, including, without limitation, the information set forth under the section entitled "Risk Factors" identifies important additional factors that could materially adversely affect actual results and performance. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of certain unanticipated events or changes to future operating results.
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the Securities and Exchange Commission ("SEC") on March 19, 2025 and our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Sterling Real Estate Trust d/b/a Sterling Multifamily Trust ("Sterling", "the Trust" or "the Company") is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT consist of real estate assets and that 75% of its gross income be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation. Our real estate portfolio consisted of 178 properties containing 12,151 apartment units and approximately 1,187,000 square feet of leasable commercial space as of September 30, 2025. The portfolio has a net book value of real estate investments (cost less accumulated depreciation) of $873,104, which includes construction in progress. Sterling's current acquisition strategy and focus is on multifamily apartment properties.
Critical Accounting Estimates
Below are accounting policies and estimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report. Certain accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see Note 2 to the unaudited consolidated financial statements). These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.
Impairment of Real Estate Investments
The Trust's investment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To assess potential impairment of the real estate portfolio, the Trust initially performs a screen test and reviews the net book value (NBV) of each property, compares the trailing twelve months (T12) net operating income (NOI) against the prior year's T12 NOI, and evaluates key assumptions, including the anticipated hold period and applicable capitalization rates, to determine whether any indicators of impairment exist.
Examples of situations considered to be impairment indicators include, but are not limited to:
| ● | A substantial decline or negative cash flows; |
| ● | Continued low occupancy rates; |
| ● | Continued difficulty in leasing space; |
| ● | Significant financially troubled tenants; |
| ● | A change in plan to sell a property prior to the end of its useful life or holding period; |
| ● | A significant decrease in market price not in line with general market trends; and |
| ● | Any other quantitative or qualitative events or factors deemed significant by the Trust's management or Board of Trustees. |
If the presence of one or more impairment indicators as described above is identified 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 Trust 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; |
| ● | 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 Trust will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value. Based on our evaluation, there was one impairment loss of $735 during the three and nine months ended September 30, 2025 and no impairment losses during the three and nine months ended September 30, 2024.
There have been no material changes in our Critical Accounting Policies as disclosed in Note 2 to our financial statements for the nine months ended September 30, 2025 included elsewhere in this report.
Acquisition of Real Estate Investments
The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values. In making estimates of relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, included independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considered information obtained about each property as a result of its pre-acquisition due diligence, marketing, and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
REIT Status
We operate in a manner intended to enable us to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code. Under those sections, a REIT which distributes as least 90% of its REIT taxable income, excluding net capital gains, as a distribution to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. We intend to distribute to our shareholders 100% of our taxable income. Therefore, no provision for Federal income taxes is required. If we fail to distribute the required amount of income to our shareholders, we would fail to qualify as a REIT and substantial adverse tax consequences may result.
Principal Business Activity
Sterlingcurrently owns 178 properties included in the consolidated financial statements. The Trust's 141 residential properties are located in North Dakota, Minnesota, Missouri, Nebraska, and Texas and are principally multifamily apartment buildings. The Trust owns 37 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the Trust's mix of properties is 83.1% residential and 16.9% commercial (based on cost) with a total carrying value of $873,104 at September 30, 2025. Currently our focus is limited to multifamily apartment properties. We will consider unsolicited offers for purchase of commercial properties on a case-by-case basis.
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|
|
|
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|
Residential Property |
Location |
No. of Properties |
Units |
|||
|
|
|
North Dakota |
|
119 |
|
7,695 |
|
|
|
Minnesota |
|
16 |
|
3,383 |
|
|
|
Missouri |
|
1 |
|
164 |
|
|
|
Nebraska |
|
4 |
|
639 |
|
|
|
Texas |
|
1 |
|
270 |
|
|
|
|
|
141 |
|
12,151 |
|
|
|
|
|
|
|
|
|
Commercial Property |
Location |
No. of Properties |
Sq. Ft |
|||
|
|
|
North Dakota |
|
19 |
|
501,000 |
|
|
|
Arkansas |
|
2 |
|
28,000 |
|
|
|
Colorado |
|
1 |
|
17,000 |
|
|
|
Iowa |
|
1 |
|
36,000 |
|
|
|
Louisiana |
|
1 |
|
15,000 |
|
|
|
Michigan |
|
1 |
|
12,000 |
|
|
|
Minnesota |
|
5 |
|
481,000 |
|
|
|
Mississippi |
|
1 |
|
15,000 |
|
|
|
Nebraska |
|
1 |
|
19,000 |
|
|
|
Wisconsin |
|
5 |
|
63,000 |
|
|
|
|
|
37 |
|
1,187,000 |
Results of Operations
Management Highlights
| ● | Increased revenues from rental operations by $2,253 or 5.4% for the three months ended September 30, 2025, compared to the same three month period in 2024. |
| ● | Increased revenues from rental operations by $10,875 or 9.2% for the nine months ended September 30, 2025, compared to same nine month period in 2024. |
| ● | Declared dividends aggregating $0.9000 per common share for the nine months ended September 30, 2025 |
Results of Operations for the Three Months Ended September 30, 2025 and 2024
|
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Three months ended September 30, 2025 |
Three months ended September 30, 2024 |
||||||||||||||||
|
|
Residential |
Commercial |
Total |
Residential |
Commercial |
Total |
||||||||||||
|
|
|
(unaudited) |
|
(unaudited) |
||||||||||||||
|
|
(in thousands) |
|
(in thousands) |
|||||||||||||||
|
Real Estate Revenues |
$ |
38,764 |
$ |
4,966 |
$ |
43,730 |
$ |
36,519 |
$ |
4,958 |
|
$ |
41,477 |
|||||
|
Real Estate Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Taxes |
|
|
4,233 |
|
|
449 |
|
|
4,682 |
|
|
3,616 |
|
|
504 |
|
|
4,120 |
|
Property Management |
|
|
5,092 |
|
|
223 |
|
|
5,315 |
|
|
4,905 |
|
|
208 |
|
|
5,113 |
|
Utilities |
|
|
2,836 |
|
|
310 |
|
|
3,146 |
|
|
2,639 |
|
|
302 |
|
|
2,941 |
|
Repairs and Maintenance |
|
|
8,829 |
|
|
544 |
|
|
9,373 |
|
|
7,415 |
|
|
528 |
|
|
7,943 |
|
Insurance |
|
|
1,359 |
|
|
35 |
|
|
1,394 |
|
|
1,640 |
|
|
30 |
|
|
1,670 |
|
Total Real Estate Expenses |
|
|
22,349 |
|
|
1,561 |
|
|
23,910 |
|
|
20,215 |
|
|
1,572 |
|
|
21,787 |
|
Net Operating Income |
|
$ |
16,415 |
|
$ |
3,405 |
|
|
19,820 |
|
$ |
16,304 |
|
$ |
3,386 |
|
|
19,690 |
|
Interest |
|
|
|
|
|
|
|
|
6,828 |
|
|
|
|
|
|
|
|
6,701 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
7,592 |
|
|
|
|
|
|
|
|
7,604 |
|
Administration of REIT |
|
|
|
|
|
|
|
|
1,391 |
|
|
|
|
|
|
|
|
1,194 |
|
Loss on impairment of property |
|
|
|
|
|
|
|
|
735 |
|
|
|
|
|
|
|
|
- |
|
Other expense |
|
|
|
|
|
|
|
|
597 |
|
|
|
|
|
|
|
|
213 |
|
Net Income |
|
|
|
|
|
|
|
$ |
2,677 |
|
|
|
|
|
|
|
$ |
3,978 |
|
|
|
|
|
|
|
|
|
|
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|
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|
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Net Income Attributed to: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest |
|
|
|
|
|
|
|
$ |
1,570 |
|
|
|
|
|
|
|
$ |
2,284 |
|
Sterling Real Estate Trust |
|
|
|
|
|
|
|
$ |
1,107 |
|
|
|
|
|
|
|
$ |
1,694 |
|
Dividends per share (1) |
|
|
|
|
|
|
|
$ |
0.3000 |
|
|
|
|
|
|
|
$ |
0.2875 |
|
Earnings per share |
|
|
|
|
|
|
|
$ |
0.08 |
|
|
|
|
|
|
|
$ |
0.15 |
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
13,032 |
|
|
|
|
|
|
|
|
11,512 |
| (1) | Does not take into consideration the amounts distributed by the Operating Partnership to limited partners. |
Revenues
Property revenues of $43,730 for the three months ended September 30, 2025 increased $2,253 or 5.4% in comparison to the same period in 2024. Residential property revenues increased $2,245 and commercial property revenues increased $8 for the three months ended September 30, 2025 in comparison to the same period in 2024.
The following table illustrates occupancy percentages for the three month periods indicated:
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|
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|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
|
|
2025 |
|
2024 |
|
|
|
Residential |
|
93.0 |
% |
92.6 |
% |
|
Commercial |
|
90.0 |
% |
90.4 |
% |
Residential revenues for the three months ended September 30, 2025 increased $2,245 or 6.1% in comparison to the same period for 2024. Residential properties acquired since September 30, 2024 contributed approximately $742 of the increase in total residential revenues in the three months ended September 30, 2025. The remaining increase is due to increased rent charges at our stabilized properties. Residential revenues comprised 88.6% of total revenues for the three months ended September 30, 2025 compared to 88.0% of total revenues for the three months ended September 30, 2024.
For the three months ended September 30, 2025 total commercial revenues increased $8 or 0.1% in comparison to the same period for 2024. The increase is primarily attributed to increased rent charges at our stabilized properties during the three months ended September 30, 2025, compared to the three months ended September 30, 2024. Commercial revenues comprised 11.4% of the total revenues for the three months ended September 30, 2025 compared to 12.0% of total revenues for the three months ended September 30, 2024. As commercial properties are sold, commercial revenues are expected to continue declining as a percentage of total revenues.
Expenses
Residential expenses from operations of $22,349 during the three months ended September 30, 2025 increased $2,134 or 10.6% in comparison to the same period in 2024. The increase is primarily attributed to an increase of $1,414 or 19.1% and $617 or 17.1%, for repairs and maintenance and real estate taxes, respectively. The increase in repairs and maintenance was primarily due to the timing of several planned projects being completed during the quarter including painting, flooring and other maintenance work. The increase in property taxes was primarily due to general increases in stabilized properties as well as additional amounts paid as a result of acquisitions.
Commercial expenses from operations of $1,561 during the three months ended September 30, 2025 decreased $11 or 0.7% in comparison to the same period in 2024. The decrease is primarily attributed to a $55 or 10.9% decrease in real estate taxes. The decrease is partially offset by an increase of $16 or 3.0% and $15 or 7.2% for repairs and maintenance and property management, respectively, during the three months ended September 30, 2025.
Interest expense of $6,828 during the three months ended September 30, 2025 increased $127 or 1.9% in comparison to the same period in 2024. The increase in interest expense was primarily driven by increased use of lines of credit during the three months ended September 30, 2025 as compared to the same period in 2024. Interest expense as a percentage of total revenues for the three months ending September 30, 2025 and 2024 was 15.6% and 16.2%, respectively.
Depreciation and amortization expense of $7,592 during the three months ended September 30, 2025 decreased $ (12) or (0.2)% in comparison to the same period in 2024. Amortization expense will continue to decrease as lease intangibles become fully amortized but will increase upon acquisitions of intangible assets. Depreciation and amortization expense as a percentage of total revenues for the three months ended September 30, 2025 and 2024 was 17.4% and 18.4%, respectively.
REIT administration expenses of $1,391 during the three months ended September 30, 2025 increased $197 or 16.5% in comparison to the same period in 2024. The increase is primarily due to the acquisition of Sterling Pointe as compared to the same period in 2024.
Other expense of $598 during the three months ended September 30, 2025 increased $385 or 181.8% in comparison to the same period in 2024. The increase is primarily attributable to the absence of a gain on asset disposition in the current period as compared to the same period in 2024.
Results of Operations for the Nine Months Ended September 30, 2025 and 2024
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Nine months ended September 30, 2025 |
Nine months ended September 30, 2024 |
|||||||||||||||
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|
Residential |
Commercial |
Total |
Residential |
Commercial |
Total |
||||||||||||
|
|
|
(in thousands) |
|
(in thousands) |
||||||||||||||
|
Real Estate Revenues |
$ |
114,102 |
$ |
14,808 |
$ |
128,910 |
$ |
102,921 |
$ |
15,114 |
$ |
118,035 |
||||||
|
Real Estate Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Taxes |
|
|
11,375 |
|
|
1,389 |
|
|
12,764 |
|
|
11,555 |
|
|
1,492 |
|
|
13,047 |
|
Property Management |
|
|
14,822 |
|
|
673 |
|
|
15,495 |
|
|
13,798 |
|
|
648 |
|
|
14,446 |
|
Utilities |
|
|
9,531 |
|
|
810 |
|
|
10,341 |
|
|
8,346 |
|
|
778 |
|
|
9,124 |
|
Repairs and Maintenance |
|
|
21,941 |
|
|
1,502 |
|
|
23,443 |
|
|
20,229 |
|
|
1,301 |
|
|
21,530 |
|
Insurance |
|
|
4,309 |
|
|
107 |
|
|
4,416 |
|
|
4,752 |
|
|
108 |
|
|
4,860 |
|
Real Estate Expenses |
|
|
61,978 |
|
|
4,481 |
|
|
66,459 |
|
|
58,680 |
|
|
4,327 |
|
|
63,007 |
|
Net Operating Income |
|
$ |
52,124 |
|
$ |
10,327 |
|
|
62,451 |
|
$ |
44,241 |
|
$ |
10,787 |
|
|
55,028 |
|
Interest |
|
|
|
|
|
|
|
|
19,469 |
|
|
|
|
|
|
|
|
17,642 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
21,313 |
|
|
|
|
|
|
|
|
20,528 |
|
Administration of REIT |
|
|
|
|
|
|
|
|
4,335 |
|
|
|
|
|
|
|
|
4,079 |
|
Loss on impairment of property |
|
|
|
|
|
|
|
|
735 |
|
|
|
|
|
|
|
|
- |
|
Other expense (income) |
|
|
|
|
|
|
|
|
2,101 |
|
|
|
|
|
|
|
|
(1,982) |
|
Net Income |
|
|
|
|
|
|
|
$ |
14,498 |
|
|
|
|
|
|
|
$ |
14,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributed to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest |
|
|
|
|
|
|
|
$ |
8,426 |
|
|
|
|
|
|
|
$ |
9,026 |
|
Sterling Real Estate Trust |
|
|
|
|
|
|
|
$ |
6,072 |
|
|
|
|
|
|
|
$ |
5,735 |
|
Dividends per share (1) |
|
|
|
|
|
|
|
$ |
0.9000 |
|
|
|
|
|
|
|
$ |
0.8625 |
|
Earnings per share |
|
|
|
|
|
|
|
$ |
0.4700 |
|
|
|
|
|
|
|
$ |
0.5000 |
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
12,970 |
|
|
|
|
|
|
|
|
11,403 |
| (1) | Does not take into consideration the amounts distributed by the Operating Partnership to limited partners. |
Revenues
Property revenues of $128,910 for the nine months ended September 30, 2025 increased $10,875 or 9.2% in comparison to the same period in 2024. Residential property revenues increased $11,181 and commercial property revenues decreased $306 for the nine months ended September 30, 2025 from the prior year's comparable period.
The following table illustrates occupancy percentages for the nine month periods indicated:
|
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|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
|
2025 |
|
2024 |
|
|
|
Residential |
|
93.2 |
% |
92.9 |
% |
|
Commercial |
|
90.0 |
% |
90.4 |
% |
Residential revenues for the nine months ended September 30, 2025 increased $11,181 or 10.9% in comparison to the same period for 2024. Residential properties acquired since September 30, 2024 contributed approximately $742 of the increase in total residential revenues. The remainder of the increase is due to continued growth in rent charges at our stabilized properties. Residential revenues comprised 88.5% of total revenues for the nine months ended September 30, 2025 compared to 87.2% of total revenues for the nine months ended September 30, 2024.
For the nine months ended September 30, 2025, total commercial revenues decreased $306 or 2.0% in comparison to the same period for 2024. The decrease is attributed to the sale of three commercial buildings in 2024. Commercial revenues comprised 11.5% of the total revenues for the nine months ended September 30, 2025 compared to 12.8% of total revenues for the nine months ended September 30, 2024.
Expenses
Residential expenses from operations of $61,978 during the nine months ended September 30, 2025 increased $3,298 or 5.6% in comparison to the same period in 2024. The increase is primarily attributed to an increase of $1,712 or 8.5%, $1,185 or 14.2%, $1,024 or 7.4% for repairs and maintenance, utilities, and property management fees, respectively as a result of acquisitions of properties in the second quarter of 2024. The increase is offset by a decrease in insurance and real estate tax expense of $443 or 9.3% and $180 or 1.6%, respectively, during the nine months ended September 30, 2025.
Commercial expenses from operations of $4,481 during the nine months ended September 30, 2025 increased $154 or 3.6% in comparison to the same period in 2024. The increase is primarily attributed to an increase of $201 or 15.4% in repairs and maintenance during the nine months ended September 30, 2025.
Interest expense of $19,469 during the nine months ended September 30, 2025 increased $1,827 or 10.4% in comparison to the same period in 2024. Interest expense related to financing activities increased by $1,278 during the nine months ended September 30, 2025 as compared to the same period in 2024 is due to acquisition of two properties in 2024 and the debt associated with those acquisitions. Interest expense related to line of credit increased by $549 during the nine months ended September 30, 2025 as compared to the same period in 2024 for operating needs. During the nine months ended September 30, 2025 and 2024, interest expense was 15.1% and 14.9% of total revenues, respectively.
Depreciation and amortization expense of $21,313 for the nine months ended September 30, 2025 increased $785 or 3.8% in comparison to the same period in 2024. The primary reason for the increase is attributed to additional depreciation of acquired properties. Depreciation and amortization expense as a percentage of rental income for the nine months ended September 30, 2025 and 2024 at 16.5% and 17.4%, respectively.
REIT administration expenses of $4,335 for the nine months ended September 30, 2025 increased $256 or 6.3% in comparison to the same period in 2024. The increase is due to an increase in advisor fees and income tax advisory fees of $439 and $187, respectively. This is partially offset by a decrease in a one-time development fee of $350.
Other expense of $2,101 for the nine months ended September 30, 2025, increased $4,083 or 206.0% in comparison to the same period in 2024. This is primarily due to a decrease of $3,069 in realized gain on sale of real estate investments from properties disposed of in 2024 and an increase in losses of unconsolidated affiliates of $528.
Construction in Progress and Development Projects
The Trust capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes, interest, and financing costs cease, and all project-related costs included in construction in process are reclassified to land and building and other improvements.
Construction in progress as of September 30, 2025, consists primarily of construction at residential properties located in North Dakota and Minnesota. Rosedale Estates located in Roseville, MN has two projects in process for a parking structure and a parking lot. The parking structure is budgeted for $2,591, of which $2,531 has been incurred. The parking lot has a budget of $6,031, of which $5,178 has been incurred. Remaining construction in progress projects are primarily related to parking lot replacements, rehabs, window and patio replacements, roof upgrades, new CCTV cameras, and various property upgrades on multiple residential properties.
Funds From Operations (FFO)
Funds From Operations (FFO) applicable to common shares and limited partnership units means net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.
Historical cost accounting for real estate assets implicitly assumes the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. FFO was created to address this problem. It was intended to be a standard supplemental measure of REIT operating performance that excluded historical cost depreciation from - or "added back" to - GAAP net income.
Our management believes this non-GAAP measure is useful to investors because it provides supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses this non-GAAP measure to evaluate our financial results, develop budgets and manage expenditures. The method used to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Management encourages the review of the reconciliation of this non-GAAP financial measure to the comparable GAAP results.
Since the introduction of the definition of FFO, the term has come to be widely used by REITs. In the view of National Association of Real Estate Investment Trusts ("NAREIT"), the use of the definition of FFO (combined with the primary GAAP presentations required by the Securities and Exchange Commission) has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making it easier to compare the results of one REIT with another.
While FFO applicable to common shares and limited partnership units are widely used by REITs as performance metrics, all REITs do not use the same definition of FFO or calculate FFO in the same way. The FFO reconciliation presented here is not necessarily comparable to FFO presented by other real estate investment trusts. FFO should also not be considered as an alternative to net income as determined in accordance with GAAP as a measure of a real estate investment trust's performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO applicable to common shares and limited partnership units does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of sufficient cash flow to fund a real estate investment trust's needs or its ability to service indebtedness or to pay dividends to shareholders.
The following tables include calculations of FFO, and the reconciliations to net income, for the three and nine months ended September 30, 2025 and 2024, respectively. We believe these calculations are the most comparable GAAP financial measure (in thousands):
Reconciliation of Net Income Attributable to Sterling to FFO Applicable to Common Shares and Limited Partnership Units
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Three months ended September 30, 2025 |
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Three months ended September 30, 2024 |
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Weighted Avg |
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Weighted Avg |
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Shares and |
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Shares and |
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Amount |
Units |
Amount |
Units |
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(unaudited) |
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(in thousands, except per share data) |
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|
Net Income attributable to Sterling Real Estate Trust |
|
$ |
1,107 |
|
13,032 |
|
$ |
1,694 |
|
11,512 |
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Adjustments: |
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|
|
|
|
|
|
|
|
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Noncontrolling Interest - Operating Partnership Units |
|
|
1,622 |
|
18,904 |
|
|
2,641 |
|
18,679 |
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Depreciation & Amortization from continuing operations (1) |
|
|
7,254 |
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|
|
|
7,102 |
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|
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Pro rata share of unconsolidated affiliate depreciation and amortization |
|
|
2,233 |
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|
|
|
1,778 |
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Loss on impairment of real estate investments |
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735 |
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- |
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Subtract: |
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Gain on sales of land, depreciable real estate, investment in equity method investee, and change in control of real estate investments |
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- |
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(241) |
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Funds from operations applicable to common shares and limited partnership units (FFO) |
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$ |
12,951 |
|
31,936 |
|
$ |
12,974 |
|
30,191 |
| (1) | Excludes the portion allocated to noncontrolling interest in the amount of $338 and $502 for the three months ended September 30, 2025 and 2024, respectively. |
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Nine months ended September 30, 2025 |
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Nine months ended September 30, 2024 |
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Weighted Avg |
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Weighted Avg |
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Shares and |
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Shares and |
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Amount |
Units |
Amount |
Units |
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(in thousands, except per share data) |
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Net Income attributable to Sterling Real Estate Trust |
|
$ |
6,072 |
|
12,970 |
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$ |
5,735 |
|
11,403 |
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|
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Adjustments: |
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|
|
|
|
|
|
|
|
|
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Noncontrolling Interest - Operating Partnership Units |
|
|
8,735 |
|
18,666 |
|
|
9,300 |
|
18,686 |
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Depreciation & Amortization from continuing operations (1) |
|
|
20,231 |
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|
|
|
19,620 |
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|
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Pro rata share of unconsolidated affiliate depreciation and amortization |
|
|
6,741 |
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|
|
|
4,974 |
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|
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Loss on impairment of real estate investments |
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|
735 |
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|
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- |
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Subtract: |
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Gain on sale of depreciable real estate |
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- |
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|
|
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(3,069) |
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Funds from operations applicable to common shares and limited partnership units (FFO) |
|
$ |
42,514 |
|
31,636 |
|
$ |
36,560 |
|
30,089 |
| (1) | Excludes the portion allocated to noncontrolling interest in the amount of 1,082 and $908 nine months ended September 30, 2025 and 2024, respectively. |
Liquidity and Capital Resources
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, the credit quality of tenants, current lease terms, and projected expiration dates.
Our principal demands for funds are for:
(i) acquisition of real estate and real estate-related investments,
(ii) payment of acquisition-related expenses and operating expenses,
(iii) payment of dividends/distributions,
(iv) payment of principal and interest on current and any future outstanding indebtedness,
(v) redemptions of our securities under our redemption plans, and
(vi) capital improvements, development projects, and property-related expenditures.
Generally, we expect to meet cash needs for 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.
As of September 30, 2025, our unrestricted cash resources consisted of cash and cash equivalents totaling $7,391. Our unrestricted cash reserves can be used for working capital needs and other commitments. In addition, we had unencumbered properties with a gross book value of $72,995, which could potentially be used as collateral to secure additional financing in future periods.
Credit Facilities
The Trust maintains a $4,915 variable rate (floating SOFR + 2.00%) line of credit agreement with Bremer Bank, expiring in December 2026, and a $3,500 variable rate (floating SOFR + 2.00%) line of credit agreement with Bremer Bank, also expiring in December 2026. The Trust also has a $19,800 variable rate (Prime - 1.50%) line of credit agreement with Gate City Bank. This Gate City Bank line was expanded from $14,800 to $19,800 in February 2025, and the maturity date was amended from July 2029 to July 2025 and subsequently extended to October 2025 and has now been further extended to December 2025. The Trust is currently negotiating and expects to execute a revised credit facility in December 2025 which is anticipated will increase borrowing capacity and extend the maturity to a multi-year term. If the Gate City Bank line of credit is not extended, the Trust has sufficient borrowing capacity and unencumbered assets to refinance or repay the outstanding balance. The Trust's leverage ratio is low which provides flexibility to further encumber real estate assets if necessary.
At September 30, 2025, the lines of credit had $28,215 available and an unused balance of $18,785 under the agreements. The lines of credit are secured by specific properties. The Trust anticipates it will hold the lines of credit as cash resources to the Trust.
Strategic Use of Credit Facilities
In 2024 and 2025 the Trust increased utilization of lines of credit as a tactical response to favorable acquisition opportunities and the retirement of a $13 million mortgage on December 31, 2024. While lines of credit continue to serve as a treasury management tool, they are also used to provide flexibility for opportunistic investments and efficient cash management, consistent with our strategy and utilization of available credit.
Capital and Equity
The sale of our securities and issuance of limited partnership units of the Operating Partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for the Trust.
During the nine months ended September 30, 2025, we did not sell any common shares in private placement. During the nine months ended September 30, 2025, we issued 277,000 and 87,000 common shares under the dividend reinvestment plan and optional share purchases, respectively, which raised gross proceeds of $8,400. During the nine months ended September 30, 2024, we sold 302,000 common shares in a private placement. During the nine months ended September 30, 2024, we issued 255,000 and 93,000 common shares under the dividend reinvestment plan and as optional share purchases, respectively, which raised gross proceeds of $7,728.
Additionally, to reduce our cash investment and liquidity needs, the Trust utilizes the UPREIT structure whereby we can acquire property in whole or in part by issuing partnership units in lieu of cash payments. During the nine months ended
September 30, 2025, the Trust issued approximately 438,000 limited partnership units of the Operating Partnership value at $24.00 per unit of an aggregate consideration of approximately $10,518 for the purchase of real estate investments. During the nine months ended September 30, 2024, the Trust issued approximately 322,000 limited partnership units of the Operating Partnership value at $23.00 per unit of an aggregate consideration of approximately $7,396 for the purchase of real estate investments.
The Board of Trustees, acting as general partner for the Operating Partnership, determined an estimate of fair value for the limited partnership units exchanged through the UPREIT structure. In determining this value, the Board relied upon their experience with, and knowledge about, the Trust's real estate portfolio and debt obligations. The Board typically determines the fair value on an annual basis. The Trustees determine the fair value, in their sole discretion and use data points to guide their determination which is typically based on a consensus of opinion. Thus, the Trust does not employ any specific valuation methodology or formula. Rather, the Board looks to available data and information, which is often adjusted and weighted to comport more closely with the assets held by the Trust at the time of valuation. The principal valuation methodology utilized is the NAV calculation/direct capitalization method. The information made available to the Board is assembled by the Trust's Advisor. In addition, the Board considers how the price chosen will affect existing share and unit values, redemption prices, dividend coverage ratios, yield percentages, dividend reinvestment factors, and future UPREIT transactions, among other considerations and information. The fair value was not determined based on, nor intended to comply with, fair value standards under US GAAP and the value may not be indicative of the price we would get for selling our assets in their current condition. At this time, no shares are held in street name accounts and the Trust is not subject to FINRA's specific pricing requirements set out in Rule 2340 or otherwise.
As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments, or opinions that may, or may not, prove to be correct. The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units. In addition, the Board's estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.
Liquidity Outlook
Cash on hand, together with cash from operations and access to the lines of credit, is expected to provide sufficient capital to meet the Company's needs for at least the next 12 months. As appropriate, we will use cash flows from operations, net proceeds from share offerings, debt proceeds, and proceeds from the disposition of real estate investments to meet long-term liquidity demands.
Credit Quality of Tenants
We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant's credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.
To mitigate credit risk on commercial properties, we have historically looked to invest in assets that we believe are critically important to our tenants' operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor all of our properties' 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
Our residential leases are for a term of one year or less. The Advisor, with the assistance of our property managers, actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where tenants elect not to renew, we may seek replacement tenants or try to sell the property.
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.
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Nine Months Ended |
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September 30, |
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2025 |
2024 |
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(in thousands) |
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Net cash flows provided by operating activities |
|
$ |
37,827 |
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$ |
34,071 |
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Net cash flows used in investing activities |
|
$ |
(26,333) |
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$ |
(36,164) |
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Net cash flows used in financing activities |
|
$ |
(9,098) |
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$ |
(14,042) |
Operating Activities
Our real estate properties generate cash flow in the form of rental revenues, which is reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security, building maintenance costs, and real estate taxes. Additionally, we incur general and administrative expenses, advisory fees, acquisition and disposition expenses, and financing fees.
Net cash provided by operating activities was $37,827 and $34,071 for the nine months ended September 30, 2025 and 2024, respectively, which consists primarily of net income from property operations adjusted for non-cash depreciation and amortization.
Investing Activities
Our investing activities generally consist of real estate-related transactions (purchases and sales of properties) and payments of capitalized property-related costs such as intangible assets and reserve escrows.
Net cash used in investing activities was $26,333 and $36,164 for the nine months ended September 30, 2025 and 2024, respectively (this does not include the value of UPREIT units issued in connection with investing activities). For the nine months ended September 30, 2025 and 2024, cash flows used in investing activities related specifically to the acquisition of properties and capital expenditures was $27,207 and $41,104, respectively. Cash outlays related to investments in unconsolidated affiliates were $(4,540) and $(6,119) for the nine months ended September 30, 2025 and 2024, respectively. During the nine months ended September 30, 2025 and 2024, there were no proceeds from the maturity of securities. Proceeds from the sale of real estate investments during the nine months ended September 30, 2025 and 2024, were $0 and $9,863, respectively.
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 $9,098 for the nine months ended September 30, 2025. Net cash used in financing was $14,042 for the nine months ended September 30, 2024. During the nine months ended September 30, 2025, we paid $21,572 in dividends and distributions, redeemed $7,677 of shares and units, and made mortgage principal payments of $27,512. Net cash used in financing activities was $14,042 for the nine months ended September 30, 2024. For the nine
months ended September 30, 2024, we paid $20,235 in dividends and distributions, redeemed $9,768 of shares and units, received $152 from new mortgage notes payable, and made mortgage principal payments of $14,522.
Dividends and Distributions
Common Stock
We declared cash dividends to our shareholders during the period from January 1, 2025 to September 30, 2025 totaling $11,649 or $0.9000 per share, of which $5,311 were cash dividends and $6,338 were reinvested through the dividend reinvestment plan. The cash dividends were paid from our $37,827 of cash flows from operations.
We declared cash dividends to our shareholders during the period from January 1, 2024 to September 30, 2024 totaling $9,873 or $0.8625 per share, of which $4,285 were cash dividends and $5,588 were reinvested through the dividend reinvestment plan. The cash dividends were paid from our $34,071 of cash flows from operations.
The Amended and Restated Dividend Reinvestment Plan, effective January 1, 2025, permits us to provide eligible shareholders with a simple and convenient way to invest dividends as well as additional cash in additional shares of the Trust's Common Shares. The Plan is intended to be used as a vehicle for long-term investment in the Trust's common shares of beneficial interest. The number of common shares of the Trust issuable under the plan is 10,000,000. The cap on the quarterly dividend reinvestments and quarterly optional cash purchases, in each case, is $25,000. The Annual cap on purchases under the Dividend Reinvestment Plan is $100,000 and provides participants the ability to exceed such cap with approval of the Trust.
We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate cash flow and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.
The following table presents certain information regarding our dividend coverage:
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Nine months ended |
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|
|
|
September 30, |
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|
|
2025 |
2024 |
||||
|
|
|
(in thousands) |
||||
|
Cash flows provided by operations (net income of $14,498 and $14,761, respectively) |
|
$ |
37,827 |
|
$ |
34,071 |
|
Distributions in excess of earnings received from unconsolidated affiliates |
|
970 |
|
1,706 |
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|
Proceeds from sale of real estate investments and non-real estate investments |
|
83 |
|
9,863 |
||
|
Dividends declared |
|
(11,649) |
|
(6,509) |
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|
Excess |
|
$ |
27,231 |
|
$ |
39,131 |
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, 2025, the Operating Partnership declared distributions totaling $16,781 to holders of limited partnership units in our Operating Partnership, which we paid on April 15; July 15; and October 15, 2025. Declared distributions are included in dividends payable on the balance sheet. Distributions were paid at a rate of $0.3000 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
For the nine months ended September 30, 2024, we declared quarterly distributions totaling $16,096 to holders of limited partnership units in our Operating Partnership, which we paid on April 15; July 15; and October 15, 2024 . Distributions were paid at a rate of $0.2875 per unit per quarter, which is equal to the per share distribution rate paid to the common shareholders.
Sources of Dividends and Distributions
For the nine months ended September 30, 2025, we paid aggregate dividends of $11,433, of which $5,106 were paid with cash flows provided by operating activities and $6,327 were reinvested. Our FFO for the nine months ended September 30, 2025 was $42,514. Therefore, our management believes our distribution policy is sustainable over time. For the nine months ended September 30, 2024, we paid aggregate dividends of $9,745, of which $4,164 were paid with cash flows provided by operating activities and $5,579 were reinvested. Our FFO was $36,560 for the nine months ended September 30, 2024. For a further discussion of FFO, including a reconciliation of FFO to net income, see "Funds from Operations" above.
Sterling Real Estate Trust published this content on November 05, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 05, 2025 at 18:34 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]