Mesa West’s Danielle Duenas on Lending Through Her First Market Downturn
For many young professionals, the COVID-19 crisis represents their first market downturn, as well as a screeching halt to an elongated bull run. Seemingly overnight, there was a palpable shift from a hyper-competitive debt market to an uncharted territory, where only the most intrepid of financiers dared to tread.
As one of the original debt funds, Mesa West Capital has already lived through the global financial crisis, transacting successfully and coming out the other side. As such, Danielle Duenas is glad to have the experience and guidance of its principals, Jeff Friedman and Mark Zytko, as a compass during this unprecedented time.
In addition to its traditional bridge financing offerings, Mesa now has a new bucket of opportunistic capital to deploy, specifically for special situations. It’s given Duenas the chance to work on some unique market opportunities.
Commercial Observer caught up with the Santa Barbara, Calif., native in late August to hear how the past six months have been, and what’s keeping her busy as the market adapts to a new normal.
Commercial Observer: You grew up in California, correct? How did you get into real estate finance?
Danielle Duenas: Yes, in the Santa Barbara area. My dad is a contractor, so I think seeing the transformation of buildings and how that can impact a community inspired me. I always loved real estate, because it’s so tangible. I’d look at homes and land, and I was just obsessed. I’ve always loved math — people think I’m crazy — so I got a finance degree. In college I landed an internship at Marcus & Millichap, and I just never looked back.
I graduated in 2009, when there were no jobs. Absolutely none. One of my good friends was in Union Bank’s training program, and I knew I would love some kind of corporate structure like that. I just wanted a foot in the door. I got a job at City National Bank after this friend put me in touch with the head of real estate there, and I was there for six years before moving to Mesa.
How were the first days of the pandemic for you?
I graduated undergrad in 2009, and so, I’ve always worked in an up market. I had no idea what to expect, but I knew the world had changed overnight. Mesa started in 2004, and our first fund went into 2009, so knowing that our founders and the senior guys have a lot of that experience behind them already was very reassuring. They said, “Hey, we’ll be fine. We’ve got this, and we feel confident in our portfolio.”
Being somewhere stable was really helpful for me. I actually closed a deal on March 17, so that was pretty interesting, but it had been in the works for a while. It was a deal on Rodeo [Drive] with super low leverage, so we felt comfortable with it, no matter what. But, at the time, our attorney was emailing asking, “Is the title office open? Can we even record [documents]?”
So much uncertainty existed back then. We, then, hit pause for a while and started looking inward. We re-underwrote our whole portfolio, running stress scenarios. We weren’t looking at active deals at first; instead, everyone was on the phones, calling people and trying to make sense of it all. There was such limited visibility. Even now, there still is. Back in March, everyone thought that we’d be fine by July. Now, we’re talking next year. We’ve been working remotely, but there’s a lot of communication, and we’re looking at a lot of deals today.
We were reaching a boiling point in terms of competition for the deals before the pandemic hit. How was the pre-COVID [shutdown] market environment for Mesa West?
It was insanely competitive. We were bidding on some of the most competitive deals in the country, and just watching the lenders [bid for deals] was like Shark Tank. There were deals where we ended up saying, “OK, pencils down, this has gone too far, and it’s not for us.” We’ve always had that mindset of knowing our limits, knowing where we’re not comfortable.
Jeff and Mark have built a very successful company, and our portfolio is very sound. Going through 2008 and 2009 successfully was the pivoting moment for Mesa, and they’ve constructed our portfolio with all that experience and knowledge in mind.
I went into COVID knowing this was going to be a huge learning curve, and I wanted to listen and understand how people think through deals — just be a sponge and soak it all in. Have I worked on workouts in prior jobs? Yes. Have I worked on modifications? Yes. But seeing the tables turn so quickly when, before, all you’d think of was just being repaid at par or being in a safe deal all day long. I was excited to put on my learning cap, and see the ways to go through a workout and get creative. I’m fortunate to work for a firm that has sound underwriting and had a conservative mindset on deals pre-COVID [shutdown] and more than ever now.
Has your portfolio fared pretty well through COVID?
Yes. We probably have around 85 positions right now, and our [assets under management] AUM’s over $8 billion. Our portfolio hasn’t changed much. Collections are still extremely high. We may have one or two borrowers that have had discussions with us about what they’re facing, but do you attribute that to the PPP financing that burned off in July and August, or do we just have great sponsors with great talent [laughs]?
Our portfolio is predominantly office and multifamily and, as a bridge lender, we’re structured to weather things if there are shortfalls, if you have an interest reserve or interest holdbacks. I think it’s a time where people need to adhere to the structure in deals. So, if there’s a rebalancing provision or a maturity coming up, we need to address it and make sure we’re comfortable.
But, in general, our portfolio has done surprisingly well, and that’s because we’ve structured it knowing what the “ugly” can look like.
Was there any advice that Jeff [Friedman] or Mark [Zytko] gave you, in terms of what to expect from this crisis?
Jeff said, “Look, this is something that isn’t going to correct overnight. We saw this in 2009, and we saw spreads widen, and the financial markets freeze, and access to liquidity and capital was way more challenging.”
We’re actively looking at deals today but we’re being very mindful. It’s easy to get caught up in, “Oh, this is a brand-new asset. This is a great deal all day long,” but hold on … what is the true leverage? If this was a pre-COVID [pandemic] underwriting, we have to account for stressed rents, stressed concessions, stressed vacancies. Even with industrial, which is booming, the equity side isn’t necessarily underwriting rent growth.
How is the current deal flow you’re seeing?
It’s interesting, and it’s choppy. Most deals we see are pre-COVID [pandemic] deals that are finally coming back into the market with a whole new business plan. You’re not seeing many elective refinances, and very few acquisitions. Then, for the deals that are in strong markets with strong sponsors, or have a good story, it’s so competitive and everybody’s back in the market.
How are you assessing deals today, with the continued market uncertainty?
There’s so many things you have to think about before you can even look to quote a deal. The scrutiny and the level of diligence has changed and, even on the equity side, there isn’t really much pricing discovery.
Industrial has been doing fine, that’s all anyone wants to do. But, there’s the question of how multifamily and office will be impacted. For example, do you assume vacancy increases or concessions on multifamily? And how long do you expect that to continue?
I feel like everything’s so polarizing; you have the views of, “Oh, we’ll revert back to the mean much quicker than anticipated. This is more of a temporary thing. As a species, we want to go back to the norm,” but other people think this is forever changing, and no one really knows. Plus, we have an election coming up, and there’s the question of the vaccine’s timing, and whether that will give people some comfort or not.
Do you think Los Angeles is a good place to be lending right now?
L.A. is not as dense as New York or San Francisco, although it’s obviously very sprawling. I don’t know if it’ll be a net beneficiary as such, as people are instead fleeing to cities like Denver, which are less dense.
Industrial is, by far, where we’re seeing the most activity. Caps are at pre-COVID rates. You’re also seeing industrial deals in what you’d previously consider to be secondary or tertiary markets, or not an industrial hub, but these tenants want to be there.
We’ve also seen a good amount of multifamily activity; moreso, projects that were delivered right before [the pandemic], or during [the pandemic].
We have a town hall meeting every Monday to keep everybody engaged and, one time, Jeff asked the younger guys, “What are you seeing? Are your friends moving now because they can get eight-week concessions? Are they moving back home?” A lot of them, especially the ones in the city, said they’ve either moved home, or have friends who’ve negotiated really significant concessions. So, I think we’ll start to see those impacts in the next three to six months. Real estate is such a lagging indicator, and we’re oddly in a honeymoon phase.
Office [space] is going to be challenging. I’ve seen some deals in L.A. — in Culver City — but the future use of space could go either way. Maybe more people will be working remotely, so, do you need a smaller footprint? Or, to socially distance your employees, do you need a larger floor?
The Facebooks and the media and content companies are still doubling down and moving forward with their L.A. projects, but office deals are going to have to be more intensely scrutinized going forward.
How important is sponsorship post-COVID [pandemic]?
It’s always been a huge component for us as a non-recourse lender. First and foremost, you’re looking at the real estate collateral, but sponsorship is huge — it’s behavior, it’s deep pockets, it’s local market expertise, it’s who’s the operator and who’s the equity.
It’s super important, but I also wonder what the true exposure of the bigger [sponsors] is. If office takes a tumble in the next six to 12 months, that will significantly impact them.
But, yes, who you’re seeing in the market right now is really the big institutional players that have the capital, and are committing long-term to either a location or an asset type. We’re looking at a deal in Denver, and the sponsor is committed and in this for the long haul. Knowing these people have been successful and have deep pockets gives us more comfort than someone who’s a Wild West cowboy trying to come in and take advantage of a market they don’t really know.
How has your leverage level changed post-COVID?
Everybody has dialed back. You would assume that would happen, and it did. I think banks are getting capped at 50 to 55 percent of costs, and funds who were normally doing deals at 70 or 75 percent have dialed back to 65 to 70 percent.
Another interesting consideration is the concept of equity repatriation on a refinance. So, is the sponsor pulling cash out of the deal, and is now the time to do so? Strong sponsors are pushing for some money back. They committed to this project two, three years ago, and they want to pull out a couple of million.
There are unique structures and ways to get around that. Maybe you do cash neutral up front and, then, you have an earn-out where you say, “OK, if this does perform as planned, given all these unknowns, you’ll have access to additional proceeds.” Some strong deals are getting closed where they’re pulling out a lot of cash, and that’s been a unique area for us to try to figure out in terms of what we’re comfortable with, what makes sense, and how we can structure a deal to meet the borrower in the middle.
Pre-COVID, competition for industrial financings was red-hot. How are you staying ahead of your competitors with deals that you really want to land today?
It’s very competitive. I think direct financing requests are huge, because that means sponsors like working with us. So, I think the relationship element is key in this. And, we have a great track record. Pricing is basically the same as [before the pandemic]. A lot of competitors have similar sources of capital, and we’re all playing in the same sandbox, so we know that someone can easily step up and do the same thing. So, it comes down to structure, to being reasonable, and also knowing when not to get over your skis. And, again, there’s [the equity] repatriation element. Do you want to allow a sponsor to cash out $20 million on day one, or do you find a way to release that if the project performs as planned?
Are you seeing discounted loan sales yet?
I’d say not more than 85 cents on the dollar. Again, what is something marketed at versus where it truly lands? Hotels, I can’t imagine the argument for paying par. You’d assume the discounts are going to just continue to grow, but it’s just so early to know the true implications of where things are going to get squeezed.
There’s been a great deal of social unrest over the past six months, and the real estate industry is taking a harder look at itself in terms of diversity and inclusion. Do you have any thoughts around how we can encourage more diversity in commercial real estate?
I was just on a panel, actually, for CREW [Network] with some incredible women.
In terms of diversity in general, not specific to women, I’m very big on a grassroots approach. I think you need to go into high schools in underprivileged communities. A lot of people aren’t educated on the opportunities that exist within real estate. Younger kids hear real estate, and they think of a residential agent. But, there are jobs in property management, in marketing, in investor relations, in asset management, in portfolio management — there are so many avenues. I think we have to inspire the younger cohort, as there’s so many well-paid jobs in this industry.
You can ask any one firm who has an analyst posting, “What’s the profile of the 15 potential analysts you interviewed?” And, they’ll say, “white men.” So, how do you then get diversity in the door?
When you think of the Black Lives Matter movement, and different ethnicities that hold very senior positions in our industry, it’s rarer than I think people realize.Hopefully, this movement is eye-opening for people, and in a positive way.
And, I think, for women, you have to be honest with yourself, in that, this is a male-dominated industry, so are you comfortable with that? It’s an upward battle if you’re going to have a chip on your shoulder about it. But, if you’re OK with the landscape, and confident in your work, and you’re intelligent, and you work hard, then know that you will get recognized.
I’m going to steal a quote from Garland Fuller, who is the head of diversity recruitment for CBRE in L.A. and just an awesome person. She said, “We’re not looking for you to give up your seat at the table. We’re asking you to lengthen the table.”
If you’re the most qualified candidate, you should be getting the job. But, take pride in that work, and be confident in what you know and what you don’t know. Women should lean on each other. Some of my greatest friendships in life are through women I’ve met through the industry.