Q&A: Iron Hound Management Company, LLC

Robert Verrone, Principal, Iron Hound Management Company, LLC

Q: Tell us about Iron Hound Management.

A: I started Iron Hound Management in 2009. After Wachovia came to an end, I intended to launch a real estate hedge fund in partnership with a long-term hedge fund based in New York City. We were going through the process of setting everything up, and then Lehman Brothers filed for bankruptcy. I put that on hold, started doing workouts in 2009, and we've been going ever since. In about 2014-2015, we started doing debt and equity also. We have a predominantly advisory business – workouts, raising debt, and raising equity.

Q: What's going on with loan modifications? What are borrowers asking for, and what are lenders willing to give?

A: I think there are caveats to this question. The first caveat is who your lender is. Is it Fannie/Freddie, is it a balance sheet lender, or is it a CMBS lender? And then the second caveat is what is the problem. Was the property in distress pre-COVID, and it's still in trouble and needs a material modification? Or was the property doing fine pre-COVID, and it needs some forbearance to get it through this period? We handle all those situations entirely differently.

I would say CMBS special servicers have a playbook and a script that they follow, and they are a bit more stringent than balance sheet lenders. Whether it's a forbearance or loan modification, you have to bring a well-thought-out plan, and you usually have to bring new cash equity to the table. How, where, and when we use that cash equity is a negotiation, but you must be prepared to write a check.

In terms of many balance sheet lenders, they're more apt to give 60, 90, or 120 days and kick the can and defer interest or defer a portion of interest until the pandemic is over without writing a check. The non-bank lenders, the mortgage REITs, and the private equity funds are between the CMBS lenders and balance sheet lenders.

Q: What have you been able to negotiate for borrowers in terms of forbearance?

A: It depends. We received many phone calls from people asking us to help them get 60-day or 90-day forbearances, and we didn't take any of those assignments. I would say the least amount of time we got anyone on a forbearance has been six months. We've done longer forbearances, but six months have been the minimum. And I don't even know if that's going to be enough. I don't know about hotels. I have no idea when hotels are opening. And it's not merely opening; each hotel will require a ramp-up period, and hotels need tourism and business travel to survive.

Q: What's the one piece of advice that you'd give to a borrower negotiating a restructuring?

A: There are two things, and I've said them before. One is that debt is debt and equity is equity. If you have a $50 million loan and someone offered you $1 billion for the building, you aren't giving your lender any more than $50 million. You shouldn't expect that when times are bad, your lender will pick up 100% of the downside; you have to act like equity. Debt is debt, and equity is equity.

The other thing I always say is that you need to have data. Many borrowers are not prepared to tell their stories effectively or efficiently. Everything is number driven. It's not fair to call your lender up and tell them you shut down, and you don't want to pay interest for six months. You need to provide them with data. What is your carry cost? What will it cost to reopen the hotel, what will the ramp-up period look like, what is the real shortfall, and how is the borrower coming to that shortfall? We spend much time working with clients on that.

Q: And are you able to box that data confidently, given the current market uncertainty?

A: You start by picking a date. For example, you say we're going to reopen up on January 1, and this is how it's going to look when we reopen, or this tenant will start paying rent on November 1, whatever the date is, you have to pick something. Then you try and build something in the document that gives you a little flexibility if that doesn't happen. I would tell you that a lender is probably not going to negotiate without real numbers.

Q: Put on your lending hat for a second; if you held a troubled hotel loan, what would you be looking to do with it? Is it too early to consider a note sale?

A: We sold many assets, including mezzanine positions, b notes, and whole loans in 2007 and early 2008, when the market was still relatively strong. Everyone criticized us, but we had the capital to do it, and we ended up being right, and we sold stuff at 80 cents on the dollar that ultimately went to 60 cents, and we sold things at 60 cents on the dollar that eventually went to zero. To answer that question, you must know how you're capitalized and whether your institution can withstand the loss? And you need an opinion on the outlook for the asset - some of these assets are never going to come back, some will come back stronger, and some will go back to where they were. You have to make a decision.

Is it too early to consider a note sale? No, I don't think it's ever too early. It all depends on the price, how you're capitalized, and what you will do with the money once you get it. Again, there are so many factors that go into a note sale. What is that loss going to do to the CMBS trust? Will it result in a control shift or a servicing shift? So many things to consider. I think you should be looking at note sales every day.

Q: Over the past 20 years, I'd estimate that you and I have worked on hundreds of CMBS loans together. While CMBS fills a void for many borrowers, it has its shortcomings, especially during market downturns. What are some flaws that you see during the current crisis, and do you have any thoughts on improving the current CMBS model?

A: There are many things. It's such a long, complicated question.

First of all, I think that CMBS always has benefits and burdens. And the benefits are typically non-recourse financing, more IO than you'll get elsewhere, more proceeds, and a lower rate. Those are the benefits. The burdens are the servicers, and what happens if you have to do a performing loan or a non-performing loan modification.

I don't have as much sympathy as some would think for borrowers with defaulted loans that must go through the workout process. I make my living doing this, and I don't think that a lender needs to lead the negotiation. They can sit back if they want and wait for the borrower to make a good offer. Almost everyone that does a CMBS loan goes into it knowing a workout is tough and time consuming. I do have sympathy and believe the CMBS industry does itself a big disservice on how it handles what I would call performing loan modifications, such as reviewing a lease approval or an assumption request that isn't pre-approved in the loan documents. It is ridiculous how long that stuff takes, how painful it is, and its costs.

But when a loan defaults, the proceeds you received, the rate you got, and the IO you got are because of the burden, and the burden is the workout process. It is more challenging than a balance sheet lender. But if you have a good plan and you understand that you have to put something on paper that makes the lender more money than if it forecloses, you typically will get a workout done. But if you're pitching a stupid idea, for instance, the property's worth 50 cents on the dollar and you're trying to repurchase it for 30 cents, your lender is not going to return your calls. It is what it is.

Obviously, a borrower defaulting on its loan due to an economic crisis created by a global pandemic is different. However, many things have happened to borrowers over the years that were completely out of their control, and they ended up making a lot of money. Sometimes things out of your control make you a lot of money, and sometimes things out of your control lose you a lot of money. I do think the special servicers are trying their best to get through this. CMBS is CMBS; no one predicted this pandemic. We'll all get through it.

Q: You interact daily with New York City's largest landlords. Has their long-term outlook on New York real estate changed during the pandemic?

A: I think you could have different answers, even within the same organization, depending on whom you're talking to. The CFO may have a different answer than the president, and the president may have a different answer than the CEO, or the son may have a different answer than the father. But I think that long term, everyone feels New York City is going to be okay. And you have to get through the next six months to three years, however long it takes. I think few people believe this will get behind us quickly, and most people think it will be two to three years.

I think more people are worried about the current mayor and some of his policies than they are about the pandemic, to be quite honest with you.

Q: For retail and hospitality assets, are you seeing any liquidity in the market to recapitalize deals?

A: No, not unless the existing lender is willing to take a considerable discount. And that hasn't happened yet.

Q: For loans with mezzanine debt, how are mezzanine lenders approaching borrower restructurings?

A: It depends on the mezzanine lender and whether they think they're in the money or out of the money. I would say that it is rare to do a deal with the senior lender in which the mezzanine lender takes a back seat. That's the exception. You're typically negotiating with both. In some instances, you're only dealing with the mezzanine lender. Other times, you're only negotiating with the senior lender. But at some point, you will have to go back and cut a deal with the mezzanine lender. Even in transactions involving mezzanine pieces that are 50 points out of the money, you end up paying them something just because of their nuisance value, to make them go away.