Hi {{first_name | there}},
Each Tuesday, I send a short note on commercial real estate to help you be a better investor. Topics may include deal stories, how I'm thinking about risk, lessons I'm learning, and market observations as we oversee our $500MM+ CRE portfolio and serve our 1,100+ investors.
Each Tuesday, I send a short note on commercial real estate to help you be a better investor. Topics may include how we evaluate risk, lessons learned, market observations, and deal stories.
This week, I’m sharing a look inside our current deal pipeline and one opportunity that wasn't a fit.
I also want to speak directly to those of you who've committed capital to Wellings Evergreen Income Fund or Wellings Growth Fund II and are still waiting for that capital to be called. We understand waiting creates liquidity-planning uncertainty.
Where the Pipeline Stands Today
As of today, July 21, we have 23 deals active in our pipeline:
9 in screening, where we quickly eliminate deals that fall outside our check-size, asset-type, or operator-experience requirements
7 in review, which are deals that have passed initial screening and are getting a deeper look
2 where we’ve proposed our check size and structure to the operator
3 where the operator has verbally accepted our proposed structure and check size
2 with an executed LOI/term sheet, our most advanced pipeline stage
None of these deals are formally approved yet. Even an executed LOI reflects agreement on key terms, not final investment approval.
The seven deals in our three most advanced stages consist of three multifamily deals, three industrial outdoor storage deals, and one office deal.
What One Month of Pipeline Activity Looked Like
Troy Zsofka, our Managing Director of Investments, reviews our full deal pipeline each month. During one month earlier this year, 94 new-to-us operators showed us 136 deals. Two additional deals came from operators we had already vetted and invested with.
During the same month, we rejected 111 deals during initial screening and 18 after preliminary review.
We approved none in this period, while three ended the month in formal due diligence. Because deals often enter the pipeline in one month and advance or are rejected in another, these are monthly activity figures rather than a single matching group of deals.
The biggest gap in our pipeline is not volume, but fit. We are seeing attractive opportunities, but too few fall within our target check size of $4 million to $10 million and our target asset types: manufactured housing, multifamily, industrial, and retail. A large pipeline does not necessarily mean a deployable pipeline.
A Deal That Was Not a Fit
Here’s a real example of a deal from this period that did not meet our standards. Identifying details, including location, sponsor, and property, have been removed.
A sponsor came to us needing to refinance a maturing bridge loan. The property’s NOI wasn’t sufficient on its own to qualify for a new agency loan, so they were seeking preferred equity to bridge the gap. That part is normal.
Here’s what wasn’t: of the $5.66 million in preferred equity requested, $4.25 million (roughly 75% of our proposed investment) would have been used to provide liquidity to the sponsor rather than reduce leverage or fund property improvements.
Sponsor cash-out isn’t automatically a problem. It can make sense when enough sponsor equity remains in the deal, and the property’s income comfortably covers the new capital stack. Here, it didn’t work that way.
The sponsor’s model showed strong coverage on the proposed preferred equity current pay, but the calculation excluded senior debt service. When we measured the property’s actual trailing-12-month NOI against the sum of senior debt service and preferred equity current pay, the combined DSCR was only 0.91x.
In other words, the property generated only 91 cents of NOI for every dollar required to cover senior debt service and preferred equity current pay.
Their underwriting also assumed NOI would grow 21% in year one, a level they hadn’t come close to achieving during years of owning the property.
Easy pass.
The lesson for investors: for a recapitalization (and really any deal), ask exactly where your capital is going and whether the property’s current NOI—not just projected NOI—supports the preferred equity and senior debt payments.
This brief financial review is only one part of our 26-part operator due-diligence process. It covers areas such as track record verification, alignment, market and underwriting analysis, debt and legal review, background checks, property visits, references, insurance, environmental risks, and ongoing diligence after closing.
If you’d like a copy, reply with “DD process” and we’ll send it to you.
A Note for Investors With Uncalled Commitments
If you’ve committed capital to Evergreen Income Fund or Growth Fund II and it hasn’t been called yet, we understand the desire to get your money to work. We want to get your money to work as well. Though deals are progressing, we can’t responsibly promise a specific call date, since a call only happens once a deal clears diligence.
If you’d like a status update specific to your own commitment, schedule a call with our team here, or just reply to this email and we’ll get something set up.
The Bigger Point
Deployment speed matters, especially when investors are holding liquidity for an uncalled commitment. But getting money to work should be the result of an investment clearing the underwriting process...not a deadline that forces the underwriting bar lower.
A low deal approval rate does not guarantee good outcomes. The goal is to apply the same standards consistently, even when capital has been waiting longer than we would prefer.
All the best,
Ben Kahle
Managing Partner | Wellings Capital | www.wellingscapital.com