KKR Real Estate Select Trust N-CSR/ACertified annual shareholder report (management investment company) (amended)

Item 1. Reports to Stockholders. The audited financial statements relating to the Registrant’s significant subsidiaries are included below. The remainder of Item 1 is incorporated herein by reference to the Report.

KRE HQ AT FIRST LLC

Consolidated Financial Statements

As of December 31, 2022

(And Independent Auditor’s Report thereon)

KRE HQ AT FIRST LLC

Table of Contents

INDEPENDENT AUDITOR’S REPORT

To KRE HQ at First LLC:

Opinion

We have audited the consolidated financial statements of KRE HQ at First LLC and its subsidiaries (the “Company”), which comprise the consolidated balance sheet as of December 31, 2022, and the related consolidated statements of operations, changes in members’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance

with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with GAAS, we:

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

March 29, 2023

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KRE HQ AT FIRST LLC

Consolidated Balance Sheet

As of December 31, 2022

See accompanying notes to consolidated financial statements.

3

KRE HQ AT FIRST LLC

Consolidated Statement of Operations

For the year ended December 31, 2022

See accompanying notes to consolidated financial statements.

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KRE HQ AT FIRST LLC

Consolidated Statement of Changes in Members’ Equity

For the year ended December 31, 2022

See accompanying notes to consolidated financial statements.

5

KRE HQ AT FIRST LLC

Consolidated Statement of Cash Flows

For the year ended December 31, 2022

See accompanying notes to consolidated financial statements.

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

KRE HQ at First LLC (the “Company”) is a Delaware limited liability company formed on June 24, 2021, with operations commencing on July 30, 2021. The Company was formed with the purpose of directly, or indirectly, acquiring, owning, and leasing certain real property related to an investment in San Jose, California.

The Company is a limited liability company (LLC). LLCs are formed in accordance with the laws of the state in which they are organized. An LLC is generally an unincorporated association of one or more persons, and no member shall be bound by, or personally liable for, the expenses, liabilities, or obligations of the individual company. The members are not obligated to restore capital deficits. The Company will continue in existence until dissolved in accordance with the provisions of the LLC operating agreement and is funded through the equity contributions of the members. Profits, losses, and distributions are generally allocated to the members in accordance with the provisions of the LLC operating agreement.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, KRE HQ at First Mezz B LLC, KRE HQ at First Mezz A LLC and KRE HQ at First Owner LLC. All intercompany transactions and balances have been eliminated in consolidation.

Real estate investments are stated at cost less accumulated depreciation and amortization. The cost includes acquisitions, development and construction, and tenant improvements. Depreciation and amortization are recorded over estimated useful lives ranging from 5 to 40 years by use of the straight-line method. Tenant improvements are depreciated over the shorter of the estimated useful lives or the term of the related leases. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized.

The Company considers short-term investments with original maturities of 90 days or less to be cash equivalents. The Company’s cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Debt issuance costs are reflected as a reduction to the mortgage notes payable liability on the balance sheet. Deferred financing costs are recorded at cost and amortized to interest expense using the effective-interest method over the term of the related loan. As of December 31, 2022, the Company had deferred financing costs of $6,947,386 which is net of accumulated amortization of $831,729.

The Company assesses the carrying value of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset, or group of assets, may not be recoverable. Impairment losses are recorded on long-lived assets when indicators of impairment are

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

present and the future undiscounted net cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The Company recognizes an impairment loss to the extent the carrying amount exceeds the fair value of the assets. Fair value is determined through various techniques including discounted cash flow models, and third-party independent appraisals, as considered necessary. No impairment charges were recognized for the period ended December 31, 2022.

The Company accounts for the purchase of real estate as asset acquisitions. The related acquired physical assets, in-place leases, and customer relationships, if any, are recorded at their estimated fair values. The fair value of the acquired property is determined on an “as-if-vacant” basis considering a variety of factors, including the physical condition and quality of the properties, estimated rental and absorption rates, estimated future cash flows, and valuation assumptions consistent with current market conditions. The “as-if-vacant” fair value is allocated to land and building based on relevant information obtained in connection with the acquisition of the properties. The fair value of acquired in-place leases consists of the following components, as applicable (1) the estimated cost to replace the leases, including foregone rents during the period of finding a new tenant, foregone recovery of tenant pass-through costs, tenant improvements, and other direct costs associated with obtaining a new tenant, and (2) the above-market/below-market portion of the leases, determined by comparing the projected cash flows of leases in place to projected cash flows of comparable market-rate leases, measured over a period equal to the remaining noncancelable lease term for above-market leases, and the remaining noncancelable lease term plus the term of any below-market, fixed rate, renewal options for below-market leases. Acquired in-place lease value is amortized as amortization expense on a straight-line basis over the remaining term of the underlying lease, which was 13 years at acquisition. Acquired above-market and below-market leases are amortized on a straight-line basis as an adjustment to rental revenue over the remaining term of the underlying lease, which was 13 years at acquisition. Should a tenant terminate its lease, the unamortized portion of the acquired in-place lease value, acquired above-market leases and below-market leases associated with that tenant are written off to amortization expense or rental revenue.

The Company’s revenues consist of rental revenue and other income.

Rental Revenue

Rental revenue is recognized in accordance with ASC Topic 842, Leases, and consists of (i) cash rents, which represents revenue each tenant pays in accordance with the terms of its respective lease that is recognized on a straight-line basis over the non-cancelable term of the lease, and includes the effects of rent steps and rent abatements under the leases, (ii) amortization of acquired above and below-market leases, net, (iii) tenant reimbursements, which are recoveries of all or a portion of the operating expenses and real estate taxes of the property and is recognized in the same period as the expenses are incurred and (iv) lease termination income, if any. The Company’s leases, which comprise the lease-up of office, garage and telecom space to tenants, primarily under non-cancellable operating leases, have terms generally ranging from five to fifteen years. Most of the Company’s leases provide tenants with extension options at either fixed or market rates and a number of its leases provide tenants with options to early terminate, but such options generally impose an economic penalty on the tenant upon exercising.

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

The Company evaluates the collectability of tenant receivables for payments required under the lease agreements. If the Company determines that collectability is not probable, the difference between rental revenue recognized and rental payments received is recorded as an adjustment to “rental revenue” in its consolidated statement of operations.

Other Income

Other income includes interest income. For the period ended December 31, 2022, the Company earned $37,724 of interest income.

The Company is an LLC. The Company is treated as a partnership for federal income tax purposes. Members are responsible for reporting their allocable share of the Company’s income, gains, deductions, losses, and credits on their respective tax returns. The Company is disregarded for income tax purposes as it is a multi-member LLC. As a result, the Company is not subject to either federal, state, or local income taxes, as the obligation for the Company’s taxable income is its members. Therefore, no provision or liability for federal, state, or local income taxes has been included in the accompanying consolidated financial statements.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets, liabilities, revenue, and expenses reported. Such estimates include the allocation of the purchase price of acquired real estate investments among tangible and intangible assets, determination of the useful life of property and other long-lived assets, and valuation and impairment analysis of long-lived assets and other long-lived assets. These estimates and assumptions are based on management’s best judgment and subject to change as conditions change.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. We are subject to risks incidental to the ownership and sale of real estate. These include, among others, the risks normally associated with changes in the general economic climate, trends in the real estate industry, availability of real estate, changes in tax laws, interest rate levels, and availability of financing and potential liability under environmental and other laws.

The Company believes the estimates and assumptions underlying these financial statements are reasonable and supportable based on the information available as of December 31, 2022.

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, an update to ASC Topic 842, Leases. ASU 2016-02 amends the existing guidance for lease accounting by requiring lessees to, among other things, (i) recognize most leases on their balance sheets, (ii) classify leases as either financing or operating, and (iii) record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. ASU 2016-02 is effective for non-public entities for fiscal years beginning after December 31, 2021. The Company adopted the provisions of ASU 2016-02 on January 1, 2022, using the alternative modified retrospective method, also known as the transition relief method, permitted under ASU 2018-11.

While accounting for lessors under ASU 2016-02 is substantially similar to existing lease accounting guidance, lessors are required to separate payments received pursuant to a lease between lease components (payments received towards the leased space) and non-lease components (payments received towards common area maintenance activities). In July 2018, the FASB issued ASU 2018-11, which provided lessors with a practical expedient to not separate lease and non-lease components, if certain criteria are met. Upon the adoption of ASU 2016-02, the Company elected this practical expedient and accordingly, have combined lease and non-lease components into rental revenue on the Company’s consolidated statement of operations. The Company accounts for both components under ASC Topic 842. ASU 2016-02 also requires companies to account for the impairment of receivables arising from operating leases (previously recorded as bad debt expense, a component of “operating expenses”), as a reduction to “rental revenue”. Accordingly, beginning on January 1, 2022, impairment of receivables arising from operating leases have been recorded as a reduction of rental revenue and are no longer reflected as bad debt expense. For the year ended December 31, 2022, there were no impairment of receivables recorded by the Company.

Furthermore, ASU 2016-02 also updates the definition of initial direct costs for both lessees and lessors to include only incremental costs of a lease that would not have been incurred if the lease had not been obtained. This ASU also provides a package of practical expedients which permits companies not to reassess under ASC Topic 842, its prior conclusions about lease identification, lease classification and initial direct costs. This adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, an update to ASC Topic 326, Financial Instruments – Credit Losses. ASU 2016-13 requires measurement and recognition of expected credit losses on financial instruments measured at amortized cost at the end of each reporting period rather than recognizing the credit losses when it is probable that the loss has been incurred in accordance with current guidance. In November 2018, the FASB issued ASU 2018-19, which clarified that receivables arising from operating leases are not within the scope of ASC Topic 326, and instead, impairment of receivables arising from operating leases should be accounted for under the scope of ASC Topic 842, Leases. In May 2019, the FASB issued ASU 2019-05, which provides transition relief for entities adopting ASU 2016-13 by allowing entities to elect the fair value option on certain financial instruments. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2022, with early adoption permitted for fiscal years beginning after December 15, 2019. The Company believes that the adoption of ASU 2016-13 will not have a material impact on the Company’s consolidated financial statements.

In December 2018, the FASB issued ASU 2018-20, an update to ASC Topic 842, Leases. ASU 2018-20 allows lessors to make an accounting policy election not to evaluate whether sales taxes and similar

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

taxes imposed by a governmental authority on a specific lease transaction and collected by the lessor from the lessee are the primary obligation of the lessor. A lessor that makes this election must exclude from the consideration in the contract and from variable payments not included in the consideration in the contract all taxes within the scope of the election and make additional disclosures. ASU 2018-20 requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf from variable payments, but lessor costs that are paid by the lessor and reimbursed by the lessee are required to be included in variable payments. The effective date of ASU 2018-20 is required to coincide with the effective date of ASU 2016-02. The Company adopted the provisions of ASU 2018-20 on January 1, 2022, in conjunction with the adoption of ASU 2016-02. This adoption did not have a material impact on the Company’s consolidated financial statements.

As of December 31, 2022, real estate, net consists of the following components:

Lease intangible assets and liabilities subject to amortization consist of the following as of December 31, 2022:

The weighted average amortization period for intangibles, net, and leasing commissions as of December 31, 2022, is 12 years. Amortization of above-market leases was $1,878,924 for the year ended December 31, 2022, and was recorded as a decrease to rental revenue on the accompanying consolidated statement of operations. Amortization of in-place leases and leasing commissions was $1,241,436 and $724,824, respectively, for the year ended December 31, 2022, and was recorded to depreciation and amortization expense on the accompanying consolidated statement of operations.

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

At December 31, 2022 the estimated amortization in aggregate and for each of the next five years ending December 31 and thereafter is:

On July 30, 2021, the Company entered into a $408,000,000 mortgage loan agreement with JP Morgan Chase Bank, NA, and Barclays Capital Real Estate Inc. collectively as Lenders.

The loan terms are summarized as follows:

The following table summarizes the Company’s mortgage notes payable activity for the year ended December 31, 2022:

The Company’s revenue consists of rental revenue and other income. The Company leases office space to a tenant with a remaining term of 12 years, expiring in December 2034 with renewal options for additional terms. The components of rental revenue for the year ended December 31, 2022 were as follows:

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

The following is a schedule of future minimum rentals on non-cancelable operating leases as of December 31, 2022, for each of the five succeeding years commencing January 1, 2023.

The Company’s outstanding membership interests are governed by their limited liability company agreement.

Company Loan

The Company has made a loan (Company Loan) to Drawbridge Asset Management LLC (DAM), as evidenced by that certain Amended and Restated Non-Recourse Promissory Note dated August 13, 2021 in the principal amount of $538,375 and is included in note receivable on the balance sheet. Per the terms of the non-recourse promissory note, interest shall be compounded annually at a rate per annum equal to 5.0%. As of December 31, 2022, the note receivable balance is $533,863.

Property Management Fee

The property is managed by Drawbridge Realty Management LLC (“DRM”), an affiliate of the Company. DRM earns property management fees equal to the amount of management fees charged to and paid by tenants pursuant to each tenant lease, less the amount paid to a third-party manager. For the year ended December 31, 2022, the Company incurred property management fees of $647,302. As of December 31, 2022, the Company had $0 of unpaid property management fees.

The Company is not subject to any material litigation nor to management’s knowledge is any material litigation currently threatened against the Company other than routine litigation, claims, and administrative proceedings arising in the ordinary course of business. Management believes that such routine litigation, claims, and administrative proceedings will not have a material adverse impact on the Company’s consolidated financial position or results of operations.

The Company’s financial instruments mainly consist of cash and cash equivalents, tenant receivables, accounts payable, accrued expenses and other liabilities. Due to the short-term nature of these instruments, the carrying amounts approximate fair value as December 31, 2022.

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KRE HQ AT FIRST LLC

Notes to Consolidated Financial Statements

December 31, 2022

The Company has evaluated subsequent events from the consolidated balance sheet date through March 29, 2023, the date at which the consolidated financial statements were available to be issued. Based on this evaluation, there are no events that would require additional recognition or disclosure.

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KRE MREG CITY AVE VENTURE LLC

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

KRE MREG City Ave Venture LLC

Index to Consolidated Financial Statements

Report of Independent Auditors

To the Members of

KRE MREG City Ave Venture LLC

Opinion

We have audited the consolidated financial statements of KRE MREG City Ave Venture LLC (the “Company”), which comprise the consolidated balance sheet as of December 31, 2022, and the related consolidated statements of operations, changes in members’ equity and cash flows for the period from October 12, 2022 (Commencement of operations) through December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations, changes in members’ equity and its cash flows for the period from October 12, 2022 (Commencement of operations) through December 31, 2022 in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as

A member firm of Ernst & Young Global Limited

fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we:

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

March 30, 2023

A member firm of Ernst & Young Global Limited

KRE MREG City Ave Venture LLC

Consolidated Balance Sheet

As of December 31, 2022

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

5

KRE MREG City Ave Venture LLC

Consolidated Statement of Operations

For the period October 12, 2022 (Commencement of Operations) to December 31, 2022

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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KRE MREG City Ave Venture LLC

Consolidated Statement of Changes in Members’ Equity

For the period October 12, 2022 (Commencement of Operations) to December 31, 2022

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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KRE MREG City Ave Venture LLC

Consolidated Statement of Cash Flows

For the period October 12, 2022 (Commencement of Operations) to December 31, 2022

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

1. Organization

KRE MREG City Ave Venture LLC (the “Company”) is a Delaware limited liability company formed on April 22, 2022 to own interests in subsidiaries which hold a fee simple interest in Presidential City (“City Ave”), a mixed-use property consisting of 1,015 apartment units and 78,000 rentable square feet of office and retail space located in Philadelphia, Pennsylvania. The Company is governed by its Amended and Restated Limited Liability Company Agreement (the “LLCA”) dated October 12, 2022 (the “Commencement of Operations”), and its term shall continue until the sale or disposition of City Ave, unless terminated earlier upon the occurrence of certain events, or otherwise extended in accordance with the LLCA.

The Company’s investment in City Ave has been made through KRE MREG City Ave Venture REIT LLC (“REIT Subsidiary”). The REIT Subsidiary intends to elect and maintain its qualification to be taxed as a real estate investment trust (“REIT”) under the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), for U.S. federal income tax purposes. As such, the REIT Subsidiary is not subject to U.S. federal income tax.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The consolidated financial statements are prepared in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”), the authoritative reference for U.S. generally accepted accounting principles (“GAAP”).

The Company consolidates all entities that are controlled either through majority ownership or voting rights. The Company also identifies entities for which control is achieved through means other than through voting rights (a variable interest entity or “VIE”) using the analysis as set forth in ASC 810, Consolidation of Variable Interest Entities, and determines when and which variable interest holder, if any, should consolidate the VIE. The Company has no consolidated variable interest entities at December 31, 2022. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

Cash

The Company maintains cash accounts which from time to time exceed the insured maximum of $250,000 per account. The carrying amount of cash and cash equivalents approximates fair value.

Restricted Cash

Restricted cash includes tenant security deposits and reserve balances held by the lender of the Company’s Mortgages Payable for capital improvements, commercial leasing costs, tenant improvements, real estate taxes, and insurance. The carrying amount of restricted cash approximates fair value.

Real Estate

Real estate assets held for use are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment. Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as betterments or the life of the related asset will be substantially extended beyond the original life expectancy.    

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KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

Depreciation is computed using a straight-line method over the estimated useful lives ranging from 10 to 40 years.

Real estate assets are evaluated for indicators of impairment when events or changes in circumstances occur that may indicate that the carrying amount of the real estate assets may not be recoverable from its use and eventual disposition. Factors that the Company may consider in its impairment analysis include, among others: (1) significant underperformance relative to historical or anticipated operating results; (2) significant negative industry or economic trends; (3) costs necessary to extend the life or improve the real estate asset; (4) significant increase in competition; and (5) ability to hold and dispose of the real estate asset in the ordinary course of business. A real estate asset is considered impaired when the sum of estimated future undiscounted cash flows expected to be generated by the real estate asset over the estimated remaining holding period is less than the carrying amount of such real estate asset. Cash flows include operating cash flows and anticipated capital proceeds generated by the real estate asset. If the sum of such estimated cash flows is less than the carrying amount of the real estate, an impairment charge is recorded equal to the excess of the carrying value of the real estate asset over the fair value. When determining the fair value of a real estate asset, the Company makes certain assumptions including, but not limited to, consideration of projected operating cash flows, comparable selling prices and projected cash flows from the eventual disposition of the real estate asset based upon the Company’s estimate of a capitalization rate and discount rate. There were no impairments of our real estate assets as of December 31, 2022.

Intangibles

The Company accounts for acquisitions of real estate in accordance with ASC 805, Business Combinations, which first requires that the Company determine if the real estate investment is the acquisition of an asset or a business combination. Under either model, the Company must identify and determine the fair value of any assets acquired and liabilities assumed. The Company generally views acquisitions of operating real estate properties as asset acquisitions, which results the capitalization of acquisition costs and the allocation of the purchase price to the assets acquired and liabilities assumed based on the relative fair values of each respective asset and liability.

Assets acquired and liabilities assumed include land, building, building improvements, tenant improvements, furniture, fixtures and equipment, mortgages payable, and identified intangible assets and liabilities, which generally consists of above or below market leases values, in-place lease values, and other lease-related values. In estimating fair values for purposes of allocating the purchase price of City Ave to tangible assets acquired, the Company utilizes various methods including a market approach, which considers recent sales of similar properties, adjusted for differences in location and state of the physical asset, or a replacement cost approach, which considers the composition of structures acquired, adjusted for depreciation based on industry standard information and estimated useful lives of the acquired property. In estimating fair values for purposes of allocating the purchase price of City Ave to intangible assets acquired, the Company considers the estimated cost of leasing City Ave assuming the property was vacant, the value of the current lease agreements relative to market-rate leases, and the estimation of total lease-up time including lost rents.

Revenue Recognition

The Company’s revenues are derived from lease agreements with tenants which are accounted for under ASC 842, Leases. Lease agreements generally provide for fixed rent payments, representing revenue each tenant pays in accordance with the terms of its respective lease, recognized on a straight-line basis over the lease agreement’s non-cancellable term. Rental revenue attributable to variable lease payments, including reimbursement of certain operating expenses, parking, and miscellaneous fees, are recognized as earned. Leases agreements with residential tenants are generally for one-year terms and lease agreements with commercial tenants are generally for periods of 5-10 years, both of which are renewable upon consent of both parties.

The Company evaluates the collectability of tenant receivables for payments required under the lease agreements. If the Company determines that collectability is not probable, the Company recognizes any difference between revenue recognized to date and payments that have been collected from the tenant as a current period adjustment to rental revenue.    

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

Deferred Financing Costs

Costs related to obtaining and assuming the mortgages payable are presented on the consolidated balance sheet as a direct deduction from the carrying amount of the associated obligation. These costs are amortized over the contractual term of the related obligation as interest expense using the effective interest method.

Financial Instruments

Financial instruments held by the Company include cash and restricted cash, tenant accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses and other liabilities, and mortgages payable. The fair value of these financial instruments, excluding the fair value of the mortgages payable, approximates their current carrying amount.

GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation. See Note 8 – Fair Value Measurements for details of the Company’s valuation policy.

Risks and Uncertainties

The Company, as an owner of real estate assets, is subject to various environmental laws of federal and local governments. Compliance by the Company with existing laws has not had a material adverse effect on the Company’s financial position or results of operations, and management does not believe it will have such an impact in the future. However, the Company cannot predict the impact of new or changed laws or regulations on City Ave.

The REIT Subsidiary is subject to significant tax risks. If the REIT Subsidiary fails to maintain its qualification as a REIT in a given taxable year, it may be subject to penalties as well as federal, state and local income tax on its taxable income, which could be material. It would also not be able to qualify as a REIT for the subsequent four taxable years, unless entitled to relief under certain statutory provisions.

A REIT must distribute at least 90% of its taxable income to its stockholders, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition to the 90% distribution requirement, a REIT is subject to a nondeductible excise tax if it fails to make certain minimum distributions by calendar year-end. The excise tax imposed is equal to 4% of the excess of the required distribution (specified under U.S. federal tax law) over the distributed amount for such year. Distribution of the remaining balance may extend until timely filing of the REIT’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

The novel coronavirus (“COVID-19”) pandemic has evolved since its onset during the first quarter of 2020, and while the global economy has begun to recover, uncertainty around future developments remain. COVID-19 has also affected global supply chains, the labor market, and inflation, which continue to impact many industries, including the real estate industry. In response, the Federal Reserve raised interest rates in 2022 and has indicated that it foresees further interest rate increases in 2023. The overall impact to the global economy will depend largely on the recovery of disrupted supply chains and industries, the extent of the labor market interruptions, the result of the Federal Reserves’ policies, and other government interventions. The current and future financial, economic and capital markets environment could remain uneven, and presents uncertainty and risk with respect to the performance of the Company’s real estate assets, and the Company’s financial condition, results of operations, liquidity, and ability to make distributions.

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

3. Real Estate

At Commencement of Operations, the Company acquired City Ave, a mixed-use property consisting of 1,015 apartment units and 78,000 rentable square feet of office and retail space located in Philadelphia, Pennsylvania. Upon acquisition, $302.2 million of the purchase price was allocated to tangible assets including $74.5 million to land, $218.1 million to building and improvements, $8.4 million to furniture, fixtures, and equipment, and $1.2 million to tenant improvements.    

As of December 31, 2022, real estate consisted of the following ($ in thousands):

Depreciation expense for the period ended December 31, 2022 approximated $3.7 million.

4. Intangibles

Upon acquisition of City Ave, $25.9 million of the purchase price was allocated to intangible assets including $25.3 million to in-place leases, $0.1 million above market leases, $0.3 million to below market leases, and $0.8 million to other lease related values.    

As of December 31, 2022, the Company’s intangibles are comprised of the following:

Amortization of in-place and other lease values for the period ended December 31, 2022 approximated $5.2 million and is included in depreciation and amortization on the consolidated statement of operations.

Amortization of above and below market lease values for the period ended December 31, 2022 approximated $8,000 and $32,000, respectively, and is included in rental revenue on the consolidated statement of operations.

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

As of December 31, 2022, the estimated amortization of these intangibles for the next five years is approximately as follows:

At acquisition, the weighted average amortization period for acquired lease intangibles was approximately 1.4 years and the weighted average amortization period for below market lease values was approximately 2.9 years.

5. Mortgages Payable

Upon acquisition of City Ave, the Company assumed financing from the prior owner in the form of a $290.0 million mortgages payable consisting of a $217.6 million senior mortgage payable, $57.4 million senior mezzanine loan, and a $15.0 million junior mezzanine loan (collectively, the “Mortgages Payable”). The Mortgages Payable are secured by interests in City Ave and wholly owned subsidiaries of the REIT Subsidiary. Upon acquisition of City Ave, $39.7 million of the purchase price was allocated to the assumed Mortgages Payable based on favorable terms compared to market.

The senior mortgage payable requires interest only payments at a fixed rate of 3.50% per annum and has a maturity date of September 8, 2029. The senior mortgage payable may be defeased in whole or in part without penalty ninety days prior to maturity, subject to customary terms and conditions, with defeasement allowed prior to such date subject to a prepayment fee.

The senior and junior mezzanine loans require interest only payments at fixed rates of 6.75% and 8.185% per annum, respectively, and have a maturity date of September 8, 2029. The senior and junior mezzanine loans may be defeased in whole or in part without penalty ninety days prior to maturity, subject to customary terms and conditions, with defeasement allowed prior to such date subject to a prepayment fee.

As of December 31, 2022, Mortgages Payable, net consisted of the following ($ in thousands):

Amortization of deferred financing costs and discount for the period ended December 31, 2022 approximated $1.3 million and is included in interest expense on the consolidated statement of operations.

6. Members’ Equity

KREST Operating Partnership, L.P. (the “Manager”) is the Manager of the Company. The Manager has made an initial contribution in exchange for an interest in the Company. MREG Main Line AIV, LP (the “MREG Member”) has made an initial contribution in exchange for as interest in the Company. MREG Presidential Promote LLC

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

(“MREG Promote”, and together with the Manager and the MREG Member, the “Members”), is also a member however it has no obligation to make a contribution to the Company.

Pursuant to the LLCA, all future capital contributions will be made by the members in accordance with the members’ respective percentage interests.

Allocation of Profits and Losses

According to the provisions of the LLCA, each item of income, gain, loss, expense, deduction or credit of the Company shall be allocated among the Members pro-rata based on their initial capital contribution. Income and losses from the Company are generally allocated to the Members in a manner consistent with cash distribution priorities. Income and loss allocations are based on an assumed liquidation of the Company’s net assets at the end of the reporting period, including investments at reported fair value.

Distributions

According to the provisions of the LLCA and beginning on December 31, 2025 and occurring on each three-year anniversary thereafter and on the date at which the Company (or its assets) has been disposed (each a “Performance Allocation Period”), the Manager shall adjust the percentage interests of each of Member other than the MREG member for any positive amount equal to the sum of (i) 15% of the positive difference, if any, of (A) an amount equal to (a) the Net Asset Value (based upon the Fair Market Value) of the Company (the “NAV”) attributable to the Manager (before taking into account any outstanding Company Loans) as of the end of such Performance Allocation Period, plus (b) the aggregate amounts distributed or payments in respect of Company Loans made to the Manager during such Performance Allocation Period from the Company, minus (c) the aggregate NAV attributable to the Manager (before taking into account any outstanding Company Loans) as of the beginning of such Performance Allocation Period (or, if greater, the equity basis of the Manager as of the beginning of such Performance Allocation Period), minus (d) the aggregate amount of capital contributions or Company Loans made by the Manager during such Performance Allocation Period to the Company (the “Performance Amount”) for such Performance Allocation Period minus (B) the aggregate amount of distributions (regardless of the source or character thereof) to Manager on the last day of such Performance Allocation Period required to cause the internal rate of return from the beginning of such Performance Allocation Period to equal 9.0% per annum (the “First Hurdle Preferred Return”) for such Performance Allocation period, plus (ii) 10% of the positive difference, if any, of (A) the Performance Amount for such Performance Allocation Period, minus (B) the aggregate amount of distributions (regardless of the source or character thereof) to Manager on the last day of the Performance Allocation Period required to cause the internal rate of return from the beginning of the Performance Allocation Period to equal 11.93% per annum (the “Second Hurdle Preferred Return”) for such Performance Allocation Period, provided that in no event will the Performance Amount ever be negative.

The operating agreement of the REIT Subsidiary provides for up to 125 non-voting preferred units to be issued by the Company at a price of $1,000 per share. Such preferred units earn a preferred return of 12.0% per annum.

7. Related Party Transactions

The Company engaged Mack Property Management (Pennsylvania) LLC (“MPM”), an affiliate of the MREG Member, for property management and leasing services for City Ave pursuant to a management agreement (the “Management Agreement”). The management agreement, effective October 12, 2022, continues for a period of 12 months and generally shall automatically be extended for successive 1-year periods unless terminated earlier.

Upon acquisition of City Ave, the Company incurred an acquisition fee of $800,000 to an affiliate of the MREG Member for brokerage and due-diligence services which is included in the initial purchase price of City Ave.

Property Management

Pursuant to the Management Agreement, the Company incurs monthly property management fees based upon gross rental receipts, as defined. From Commencement of Operations through December 31, 2022, the Company incurred

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

$153,000 of property management fees which are included in management fees on the consolidated statement of operations. As of December 31, 2022, $59,000 remains unpaid and is included in accounts payable, accrued expenses, and other liabilities on the consolidated balance sheet.

Leasing Services

Pursuant to the Management Agreement, the Company incurs leasing fees based upon total base rents for the first five years of new and renewed lease agreements, adjusted for any claw backs from third party brokers. From Commencement of Operations through December 31, 2022, the Company has not incurred any leasing fees to MPM.

Asset Management

Pursuant to the LLCA, the Company incurs to an affiliate of the MREG Member monthly asset management fees based upon gross rental receipts, as defined. From Commencement of Operations through December 31, 2022, the Company incurred $56,000 of asset management fees which are included in management fees on the consolidated statement of operations. As of December 31, 2022, $21,000 remains unpaid and is included in accounts payable, accrued expenses, and other liabilities on the consolidated balance sheet.

Construction Management

Pursuant to the Management Agreement and upon request, the Company incurs construction management fees based upon the total construction contract cost. From Commencement of Operations through December 31, 2022, the Company has not incurred any construction management fees.

8. Rental Revenue

The Company has non-cancelable operating leases for space in the building. These leases provide for fixed rent payments, recognized on a straight-line basis, and variable rent payments, including reimbursement of certain operating expenses, parking, and miscellaneous fees.

The future minimum fixed rentals under the Company’s non-cancellable leases for each of the next five years are as follows:

9. Fair Value Measurements

ASC 820, Fair Value Measurement and Disclosures, establishes a framework for measuring fair value as well as disclosures about fair value measurements. It emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use when pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement fall is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Company has no financial instruments reported at fair value. Financial Instruments Not Reported at Fair Value

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value as of December 31, 2022 were as follows (in thousands):

10. Income Taxes

The Company accounts for uncertain tax positions according to GAAP. This guidance prescribes a comprehensive model for how an entity should recognize, measure, present and disclose in its financial statements uncertain tax positions that an entity has taken or expects to take on a tax return. As of December 31, 2022, the Company has not recorded any amounts for uncertain tax positions. The Company is taxed as a partnership for U.S. federal income tax purposes. As a result, the Members are responsible for reporting their allocable share of the Company’s taxable income, gains, deductions, losses and credit on the respective tax returns.

The Company has no income tax expense, deferred tax assets or deferred tax liabilities associated with any uncertain tax position for the operations of any entity included in the consolidated statement of operations. The Company’s tax returns are subject to audit by taxing authorities. The Company’s tax years ended December 31, 2022 and onward remain open to examination by major taxing jurisdictions to which the Company is subject.

The REIT Subsidiary intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with its taxable year ended December 31, 2022. As a result, the REIT Subsidiary is generally not subject to federal and state income tax on that portion of its income that it distributed to members if it distributed at least 90% of its taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains, and complied with certain other requirements to qualify as a REIT. Since Commencement of Operations through December 31, 2022, the REIT Subsidiary was in compliance with all REIT requirements. Additionally, no provision has been made for federal or state income taxes in the accompanying consolidated financial statements, as the REIT Subsidiary believes it has met the prescribed requisite requirements.

11. Commitments and Contingencies

In the normal course of business, the Company may enter into contracts that contain a variety of representations and provide for general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects the risk of future obligations under these indemnifications to be remote.

KRE MREG City Ave Venture LLC

Notes to Consolidated Financial Statements

December 31, 2022

12. Subsequent Events

The Company has assessed events through March 30, 2023, the date the Company’s financial statements were available to be issued, and noted the following: In January 2023, the REIT Subsidiary issued 125 preferred units for gross proceeds of $125,000.

C O N S O L I D A T E D  F I N A N C I A L  S T A T E M E N T S

MCH SFR Venture 3 LP

For the Year Ended December 31, 2022

With Report of Independent Auditors

MCH SFR Venture 3 LP

Consolidated Financial Statements

Year Ended December 31, 2022

Contents

		Ernst & Young LLP Suite 500 5100 Town Center Circle Boca Raton, FL 33486		Tel: +1 561 955 8000 Fax: +1 561 955 8200 ey.com

Report of Independent Auditors

To the General Partner

MCH SFR Venture 3 LP

Opinion

We have audited the consolidated financial statements of MCH SFR Venture 3 LP (the Partnership), which comprise the consolidated balance sheet as of December 31, 2022, and the related consolidated statements of operations, changes in partners’ capital and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2022, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Partnership and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Partnership’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

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A member firm of Ernst & Young Global Limited

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with GAAS, we:

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

2

A member firm of Ernst & Young Global Limited

Supplementary Information

Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying consolidating balance sheet, consolidating statement of operations and consolidating statement of cash flows are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole.

March 29, 2023

3

A member firm of Ernst & Young Global Limited

MCH SFR Venture 3 LP

Consolidated Balance Sheet

(Dollars in Thousands)

December 31, 2022

See accompanying notes.

4

MCH SFR Venture 3 LP

Consolidated Statement of Operations

(Dollars in Thousands)

For the period ending December 31, 2022

See accompanying notes.

5

MCH SFR Venture 3 LP

Consolidated Statement of Partners’ Capital

(Dollars in Thousands)

See accompanying notes.

6

MCH SFR Venture 3 LP

Consolidated Statements of Cash Flows

(Dollars in Thousands)

For the period ended December 31, 2022

See accompanying notes.

7

MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements

December 31, 2022

1. Organization

MCH SFR Venture 3 LP (the Partnership), a Delaware limited Partnership was formed on October 28, 2021; however, the Partnership’s principal operations did not commence until the year ended December 31, 2022. The Partnership was created to acquire, own and operate single-family residential rental properties. KRE MCH SFR Manager C GP, LLC is the general partner of the Partnership and has a 0% interest in the Partnership. EFI SFR JV 3, LLC (“EFI”) and KREST Operating Partnership L.P. (“KREST”) are the limited partners of the Partnership. Distributions and allocations of earnings and losses are made in accordance with the Partnership’s governing documents. Subject to the terms of the governing documents, MCH SFR Promote 3 LLC, an affiliate of EFI, may receive disproportionate distributions and related allocations of income if certain thresholds are met based on the internal rate of return to the limited partners (“Promoted Returns”). The Promoted Returns will be initially calculated on the fifth anniversary of the Partnership. No such Promoted Return was achieved as of December 31, 2022.

2. Basis of Presentation and Significant Accounting Policies Basis of Presentation

The accompanying consolidated financial statements of the Partnership include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Partnership conform to accounting principles generally accepted in the United States (“GAAP”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts and disclosures in the consolidated financial statements. These estimates include property tax assessments, the relative fair value of assets acquired and assessing single-family residential rental real estate investments for impairment. The Partnership’s estimates are inherently subjective in nature, and actual results could differ from its estimates and the differences may be material.

Investments in Single-Family Residential Rental Real Estate

Since substantially all of the fair value of the acquired properties is concentrated in a single identifiable asset or group of similar identifiable assets, and do not include a substantive process, the purchases of single-family residential rental properties are accounted for as asset acquisitions under Accounting Standards Codification (“ASC”) 805, Business Combinations. These

8

MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements (continued)

December 31, 2022

transactions are recorded at the purchase price, including acquisition costs, then allocated between land and building based on their relative fair values at the date of acquisition.

Fair value is determined under the guidance of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), primarily based on unobservable market inputs, which are generally categorized as Level 3 valuations. The Partnership utilizes its own market knowledge and published market data in making estimates of fair values for purposes of allocating purchase price. In this regard, the Partnership also utilizes information obtained from county tax assessment records to assist in the determination of the fair value of the land and building.

Subsequent expenditures for renovations that improve the property or extend the useful life of the property are capitalized and depreciated over their useful life. The aforementioned capitalized costs include third-party goods and service costs incurred. The Partnership capitalizes these costs as a component of the real estate investment, primarily as building, in each wholly-owned, single-family residential rental property. These costs, along with related holding costs, are capitalized to the cost of the property during the period the property is undergoing activities to prepare it for its intended use. The Partnership capitalizes interest costs as a cost of the property only during the period for which activities necessary to prepare an asset for its intended use are ongoing, provided that expenditures for the asset have been made and interest costs have been incurred. Additionally, costs associated with utilities, home owner’s association costs, insurance and costs to improve the properties are capitalized from the time the property is acquired until it is ready for its intended use. Single-family properties under development are reclassified to Single-family properties in operation, once the asset is placed into use.

Upon completion of the renovation of the properties, all costs of operations, including repairs and maintenance, are expensed as incurred. Building and improvements depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The Partnership utilizes an estimated useful life of 27.5 years with no salvage value for buildings.

The Partnership evaluates its single-family residential rental real estate for impairment periodically or whenever events or circumstances indicate that the carrying amount may not be recoverable. Significant indicators of impairment may include, but are not limited to, declines in home values, significant and persistent declines in an individual property’s net operating income, significant changes in the economy, or substantial damage to the individual property as a result of either casualty events or natural disasters. If an impairment indicator exists, the Partnership will prepare an internal analysis and compare the expected future undiscounted cash flows against the net carrying amount. If the sum of the estimated undiscounted cash flows is less than the net carrying amount, the Partnership will record an impairment loss for the difference between the estimated fair value of the individual property and the net carrying amount of the property at that date. The assessment of potential impairments of the Partnership’s single-family residential rental properties requires significant judgment and assessment of factors that are, at times, subject to significant

9

MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements (continued)

December 31, 2022

uncertainty. Given the subjectivity, the Partnership evaluates impairment in consideration of multiple sources of information and through the performance of internal analysis, each of which are important components to the process with no one approach being necessarily determinative. The Partnership did not record any impairment charges related to single-family properties in operation for the year ended December 31, 2022.

Single-Family Properties Held for Sale

The Partnership evaluates its single-family residential rental properties on a regular basis to ensure that individual properties still meet the investment criteria. If the Partnership determines that an individual property no longer meets its investment criteria, the Partnership may make a decision to dispose of the property. Starting at the time that any such properties are identified, the Partnership performs an evaluation to determine whether or not such properties should be classified as held for sale in accordance with ASC 360, Property Plant and Equipment (“ASC 360”). ASC 360, generally requires an asset to be classified as held-for sale if it is available for immediate sale in its present condition, there is the existence of an active program to locate a buyer, and it is probable that the property will sell within one year. Single-family properties held for sale are reported at the lower of their carrying value or estimated fair value less costs to sell and are presented separately in single-family properties held for sale, net within the consolidated balance sheet. As of December 31, 2022, the Partnership had 48 single-family properties classified as held for sale, and the Partnership recorded $3.1 million of impairment charges on single-family properties held for sale for the year ended December 31, 2022. Such amount is included in impairment on the consolidated statement of operations.

Cash and Cash Equivalents

The Partnership considers all demand deposits, money market accounts, and investments in certificates of deposit purchased with an original maturity of three months or less to be cash equivalents. The Partnership maintains cash and cash equivalents and escrow deposits at various financial institutions. The consolidated account balances at one or more of the institutions typically exceed the Federal Depository Insurance Corporation (“FDIC”) insurance coverage. The Partnership is subject to a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Partnership believes the risk is not significant given the size and credit worthiness of the financial institutions at which the funds are held.

Restricted Cash

Restricted cash includes cash deposited in separate accounts associated with tenant security deposits and certain costs required under the lending agreements. The lending agreements also require the holding of monthly rent collections in separate accounts to fund the payment of operating costs. Certain state and local laws require that tenant security deposits be maintained in

10

MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements (continued)

December 31, 2022

separate cash accounts. Proceeds from the sale of single-family residential rental real estate are held in escrow until they are applied as debt principal repayments or until substitution of a comparable property is made. Restricted cash as of December 31, 2022 consists of tenant restricted cash of $2.4 million and lender requirement restricted cash of $4.3 million.

Escrow Deposits and Advances for Future Closings

Escrow deposits and advances for future closings include refundable and non-refundable cash earnest money deposits for the purchase of properties. In addition, escrow deposits include amounts paid for single-family properties in advance of when the risks and rewards of ownership of the property are transferred and the purchase is finalized.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consists primarily of trade payables, accrued interest, and construction and maintenance liabilities.

Deferred Financing Costs

Deferred financing costs consist of amounts paid to lenders and third parties in connection with obtaining debt financing. These costs are being amortized through the respective anticipated repayment dates of the loans and included in interest expense in the consolidated statement of operations.

Revenue Recognition

The Partnership leases single-family residential rental properties to residents who occupy the properties under operating leases, generally with a term of one to two years and include extension periods at the resident’s option. The Partnership has applied ASC 842, Leases (“ASC 842”) since its inception. In accordance with ASC 842, the Partnership classifies single-family property leases as operating leases and elects to not separate the lease component, comprised of rents from single-family properties, from the associated non-lease component, comprised of fees from single-family properties and tenant charge-backs. The combined component is accounted for under ASC 842. Rents to be received based on in-place leases as of December 31, 2022 are $28.9 million.

Sales of single-family residential rental real estate and related profit or loss are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date. The performance obligation to deliver the agreed-upon home is generally satisfied at the home closing date.

11

MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements (continued)

December 31, 2022

Fair Value Measurement

Fair value is a market-based measurement and is determined based on the assumptions that market participants would use in pricing an asset or liability. The ASC 820 valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The three levels are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Income Taxes

The Partnership, MCH SFR Venture 3 LP, is a pass-through entity for U.S. federal income tax purposes. ASC 740, Income Taxes, requires that the Partnership recognize the impact of a tax position in the Partnership’s consolidated financial statements if that position is “more likely than not” of being sustained on audit based on the technical merits of the position. As of December 31, 2022, there were no uncertain tax positions that could have a material impact on the Partnership’s consolidated financial statements. The 2022 tax years remains open to examination by the taxing jurisdictions to which the Partnership is subject.

The Partnership, as a pass-through entity, is not subject to U.S. federal income tax but may be subject to certain state, local, and franchise taxes in the different jurisdictions in which it operates. U.S. federal and state jurisdictions in which the Partnership and its subsidiaries file tax returns have statutes of limitation from three to four years. No open tax returns are currently under examination.

The Partnership is subject to state income tax in the different jurisdictions it operates.    Total state income tax expense totaled approximately $84,000 for the year ended December 31, 2022 and is recognized in general and administrative expenses in the consolidated statement of operations.

12

MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements (continued)

December 31, 2022

The Partnership has one subsidiary, where it has been elected to be taxed as a corporation for U.S. federal income tax purposes. The Partnership has determined that income taxes from this subsidiary are immaterial to the Partnership’s operations.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and various subsequent amendments (“Topic 326”), which requires an entity to estimate its expected credit loss and record an allowance based on this estimate so that it is presented at the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842. Topic 326 will be effective for annual reporting periods beginning January 1, 2023, with early adoption permitted. The adoption of Topic 326 is not expected to have a material impact on the Partnership’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“Topic 848”), which provides practical expedients for reference rate reform-related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. In December 2022, the FASB extended the temporary accounting rules under Topic 848 from December 31, 2022 to December 31, 2024.

3. Debt

On January 24, 2022, certain subsidiaries of the Partnership (the “Partnership Subsidiaries”) and certain subsidiaries of another separate single-family residential rental operator investee of KREST (the “SFR Investee”), entered a Revolving Credit Facility (the “Credit Facility”) with Morgan Stanley Asset Funding, Inc., which has been subsequently amended from time to time. The Credit Facility originally provided for $500 million of borrowing capacity, and a maturity date of January 24, 2024, with two twelve-month extension options available. The Partnership Subsidiaries and SFR Investee were obligated to make monthly payments. As of December 31, 2022, the combined effective interest rate was 3.91%.

The Revolving Credit Facility is collateralized by all Partnership-owned single-family residential rental properties included in investment in single-family residential rental real estate, net on the

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MCH SFR Venture 3 LP

Notes to the Consolidated Financial Statements (continued)

December 31, 2022

consolidated balance sheet and the single-family residential rental properties owned by the SFR Investee. There are various affirmative and negative covenants, including financial covenants, as defined in the applicable credit agreements.

The Partnership Subsidiaries and the SFR Investee are jointly and severally liable for the entire amount outstanding of the Credit Facility, which was $380.0 million as of December 31, 2022; however, based on a contractual agreement between the Partnership Subsidiaries and the SFR Investee (the “Debt Sharing Agreement”), each entity will only pay the principal and interest on the Credit Facility relating to amounts for which they individually borrowed on the Credit Facility to acquire single-family residential rental properties. As of December 31, 2022, the Partnership’s individual borrowings outstanding on the credit facility were $345.6 million. To the extent that the SFR Investee default on their payments with respect to the Credit Facility, the Partnership may be liable for the remaining $34.4 million.

The following is a reconciliation of the Partnership’s indebtedness as of December 31, 2022:

4. Derivatives

During 2022, the Partnership Subsidiaries and the SFR Investee jointly purchased an interest rate cap agreement with a notional amount of $380 million terminating on January 31, 2025. The interest rate cap was purchased under the name of one of the Partnership Subsidiaries. Pursuant to the Debt Sharing Agreement described in note 3, the Partnership Subsidiaries and the SFR Investee, each entity paid the cost of the cap separately, and any cash receipts associated with the interest rate cap are allocated based on their corresponding percentages of the total debt outstanding. As of December 31, 2022, the fair value of the interest rate cap related to the Partnership was $15.4 million and the interest rate cap was valued using level 2 inputs to the fair value hierarchy. The Partnership’s allocated cost paid for the interest rate cap was $16.8 million.

The Partnership did not elect to apply hedge accounting for the interest rate cap. As such, any change in the fair value of the interest rate cap will be recorded as unrealized gain/loss on interest rate cap in the consolidated statement of operations. Additionally, any proceeds received (realized gain) by the Partnership for the interest rate cap will be recorded as a reduction to interest expense. The Partnership’s pro-rata change in the fair value of the interest rate cap of $1.4 million was

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Notes to the Consolidated Financial Statements (continued)

December 31, 2022

separately presented in the consolidated statement of operations for the year ended December 31, 2022.

The Partnership’s allocation of interest income related to the interest rate cap resulted in a realized gain of $1.3 million which was recorded as a reduction to interest expense in the consolidated statement of operations for the year ended December 31, 2022.

5. Commitments and Contingencies

Insurance Policies

Pursuant to the terms of the Partnership’s various debt agreements as well as laws and regulations of the jurisdictions in which the Partnership’s properties are located, the Partnership is required to procure insurance for the real estate investments held. For the year ended December 31, 2022, no material losses have been incurred with respect to the properties.

Legal

From time to time, the Partnership may be subject to potential liability under various claims and legal actions arising in the ordinary course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on the information currently available, the Partnership is not aware of any legal claims that are probable of occurring and are reasonably estimable and would have a material effect on the Partnership’s consolidated financial statements, and therefore, no accrual has been recorded as of December 31, 2022.

6. Related-Party Transactions

The Partnership has an agreement with My Community Homes LLC (“My Community Homes”), an affiliate of EFI, to provide asset management services including oversight of the properties, oversight of the acquisitions process and general administrative oversight. The employees of My Community Homes work for the benefit of the Partnership and other affiliated entities for which it may provide similar services. My Community Homes is compensated for such services through reimbursement of actual costs incurred as allocated to the various entities for which My Community Homes provides such services. For the year ended December 31, 2022, the Partnership was allocated its share of the overhead and expenses of the My Community Homes platform based on a methodology based on total homes owned. The total charges incurred by My Community Homes and charged to the Partnership were $2.8 million for the year ended December 31, 2022. These amounts are included in general and administrative expenses in the accompanying consolidated statement of operations. As of December 31, 2022, the Partnership recorded

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Notes to the Consolidated Financial Statements (continued)

December 31, 2022

approximately $144,000 related to prepayments of operation costs to My Community Homes in the consolidated balance sheet in Other Assets.

The Partnership purchases properties using a network of local operators. The local operators identify properties that meet the Partnership’s acquisition criteria, negotiate with buyers and prepare the transactions for closing in the name of the Partnership. One of the primary local operators is owned by the principal and owner of EFI; however, all local operators are paid commissions by the selling broker in the transaction and as a result, the Partnership did not incur any expenses for the local operators for the year ended December 31, 2022.

KKR Capital Markets LLC (“KCM”), an affiliate of KREST, received fees of $1.7 million, all of which were capitalized as deferred financing costs on the consolidated balance sheet, related to the placement of the Partnership’s Credit Facility.

7. Subsequent Events

The Partnership evaluated subsequent events through March 29, 2023, the date on which the consolidated financial statements were available to be issued.

Subsequent to December 31, 2022, the Partnership generated $6.3 million from the disposition of single-family properties held for sale as of December 31, 2022. There was no material gain or loss resulting from these transactions. Additionally, the Partnership paid down $7.1 million on the Credit Facility and received contributions of $3.5 million.

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SUPPLEMENTAL SCHEDULES

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MCH SFR Venture 3 LP

Supplemental Schedules

(Dollars in Thousands)

Consolidating Balance Sheet

The following represents the Partnership’s Consolidating Balance Sheet as of December 31, 2022:

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MCH SFR Venture 3 LP

Supplemental Schedules (continued)

(Dollars in Thousands)

Consolidating Statements of Operations

The following represents the Partnership’s Consolidating Statement of Operations for the year ended December 31, 2022:

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MCH SFR Venture 3 LP

Supplemental Schedules (continued)

(Dollars in Thousands)

Consolidating Statement of Cash Flows

The following represents the Partnership’s Consolidating Statement of Cash Flows for the year ended December 31, 2022: