Hi Reader,

Have you been following our discussions on preferred equity?

We’re excited to tell you about the new preferred equity investment we closed last Friday. But first, we want to be sure you’re tracking with us on how preferred equity works and why we believe it's such a powerful tool to protect and grow your wealth.

We did a webinar on this topic on May 12th, and it generated a lot of questions about the terms we are throwing around. So we created a glossary of preferred equity terms we are referencing in our discussions. You can view that here: https://www.wellingscapital.com/blog/preferred-equity-terms​

Our Latest Preferred Equity Investment

Wellings Real Estate Income Fund investors will soon get a detailed report on the preferred equity investment our Fund closed on last week. But I want to use this email to highlight how some of the terms in our glossary played out in this investment.

Our Fund invested $3.5 million of preferred equity in the acquisition of a value-add workforce housing deal in the Virginia Beach MSA with a seasoned sponsor. Below I’ll use the definition from our glossary in regular text. Then in italics, I will explain what that term looked like in our new investment.

Current Pay Rate: The portion of the Coupon Rate that is paid from operations.

The Current Pay Rate for this investment is 9% annually. This is actually reserved in advance for one year, and the reserved capital is invested in a money market sweep account with Fidelity, currently contributing ~4.5% to WREIF investor returns in addition to the 9% current pay.*

Accrual: The accrued portion of the Coupon rate that is paid at a capital event.

Annual accrual of 8% compounded annually. (The current pay plus accrual totals a 17% annual coupon rate.)*

Personal Guarantee: A contractual guarantee by the sponsor or Key Principal to cover the Preferred Equity in the event of a default. Similar to a full-recourse personal guarantee on a loan.

In this investment, a personal guarantee was signed by the three partners.

Forced-Sale Provision: The Preferred Equity Partner's right to effect the marketing and sale of the asset(s) if any Default Provisions are triggered.

The forced sale provision in this investment allows us to force the sale of the asset if certain provisions (such as reserves, debt service coverage ratios, etc.) aren't met. Wellings could force a sale that could theoretically result in a loss of common equity investors’ capital if necessary to protect our Wellings Real Estate Income Fund investors.

Cash Flow Sweep: The Preferred Equity Partner's right to all cash flow from operations until the cash flow covers Current Pay entirely, until a predetermined Global DSCR is achieved, or until the Preferred Equity Partner is paid off.*

The sponsor agreed to this backup reserve account until certain hurdles are surpassed.

Capital Improvement Reserves: Funds earmarked for capital improvements that are held back by the Preferred Equity Partner and released in draws as progress is made. Sometimes the draw approval will require results from former improvements to be achieved in regard to rent growth or expense reduction.

The reserve account in this investment holds the sponsor accountable for executing their plan and is only released as work is completed. But it also compounds our return since it is invested in a money market sweep account with Fidelity, currently contributing ~4.5% extra to WREIF investor returns.*

MOIC Floor: MOIC means multiple on invested capital. AKA Minimum Multiple. A minimum Multiple on Invested Capital is triggered if the Preferred Equity is paid off before that multiple is achieved through the Coupon Rate. Similar to a Prepayment Penalty on a loan.

The MOIC floor on this investment is 1.3x, which equates to a total minimum profit of 30%. If the sponsor pays us off in 18 months as planned, this should result in a 20% annualized return (rather than the coupon rate of 17%).*

We are excited about this new preferred equity investment! It is gratifying to be in the position to add investments like this that are inaccessible to individual investors. Especially in an environment like we are in right now.

We'd love to have you join us in the Wellings Real Estate Income Fund this month. Funds are due by 5 PM ET on May 31st.

If you're ready to get started, you can do so here. If you have any questions, just reply to this email.

Warm Regards,

Paul Moore

Managing Partner | Wellings Capital | www.wellingscapital.com​

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P.S. I hope you have a wonderful Memorial Day weekend relaxing with friends and family. May we never forget those who made the ultimate sacrifice for our freedom.

* There is no guarantee these projected results will be achieved.

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DISCLAIMER: The information contained in this email communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. A more detailed explanation of the various assumptions and risks associated with hypothetical information in this email is set forth in the Private Placement Memorandum ("PPM") for Wellings Real Estate Income Fund ("WREIF"). Please read the PPM before making any investment decisions. All terms of this email are subject to the terms of the PPM. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing. Information and any opinions contained in this email communication have been obtained from sources that we consider reliable, but we do not represent that such information and opinions are accurate or complete, and thus should not be relied upon as such.