A winning debt and equity double act

Jonathan Goldstein and John Cole have overseen a spate of UK development deals on both the debt and equity side of the market, taking less than two years to put US-backed Cain Hoy firmly on the UK property map, writes Paul Yandall

Goldstein: "In headline terms we are probably one of the most active players in the market place."
Goldstein (right): “In headline terms we are probably one of the most active players in the market place.”

It was during a shopping trip in the summer of 2013, standing among the tents at a trekking store in London’s Brent Cross, that Jonathan Goldstein made a significant call.

The then-deputy chief executive of Heron International had been approached by global investment and securities firm Guggenheim Partners to put together a team to invest in European property. Guggenheim would stump up $1bn of permanent capital and use its extensive connections to bring further funds into the new venture.

With six years behind him at Heron and a background in law – at one stage he was the youngest senior partner, then aged 32, at City law firm Olswang – the 48-year-old was exactly who Guggenheim were looking for to help them make a splash in Europe’s competitive commercial property market.

After mulling over Guggenheim’s proposal, Goldstein rang John Cole, at the time head of UK property finance at Landesbank Baden-Württemberg (LBBW) and said: “Look, this is what I’m thinking, do you fancy it?”

Cole, in his typically deadpan demeanour, said: “Yeah, alright.” Goldstein knew Cole prior to his LBBW days when the Yorkshireman was a director of real estate finance at Santander and they’d worked closely together. He asked: “Don’t you want to know who the backer is?”

Cole replied: “No. I trust you Jonathan. If that’s what you want to do I know you would have thought about it.”

By early 2014, Goldstein, Todd Boehly, president of Guggenheim Capital (GC) and Henry Silverman, then global head of real estate and infrastructure at Guggenheim Partners, a subsidiary of GC, had founded Cain Hoy Enterprises.

Silverman was appointed chief executive and Goldstein head of European investments. Goldstein would look after the European equity side of the business and Cole would target debt opportunities.

With the support of a small team of former Guggenheim staff – the total US and UK workforce still only numbers about 15 – Goldstein and Cole brought in Arrif Ali, also from Heron International, and Citi’s Matteo Milan, whom Cole worked with at Santander, to help launch the venture.

When Silverman stepped aside in the summer to set-up real estate investment house 54 Madison Partners, Goldstein assumed his responsibilities.

Headquartered in Greenwich, Connecticut, the home of a number of prominent US-based private equity firms, Cain Hoy was named after the South Carolina thoroughbred horse stable owned by the Guggenheim family and it raced off to make its mark.

“We started a business that was designed to look at opportunities with the capability of exploiting them with a pool of capital that is flexible and therefore can look at debt and equity,” says Goldstein.

In barely a year-and-a-half Cain Hoy has committed about £1.3bn of capital, or almost $2bn, across around a dozen deals. “Which, probably in headline terms, makes us one of the most active players in the marketplace,” says Goldstein. “Hopefully that doesn’t come back to bite us when two thirds of that, around 70%, is in debt and the balance is in equity.”

Cain Hoy’s existing deals include more than £750m of debt investments. All of its loan facilities are development-led, with the lender generally seeking higher-yielding senior facilities.

“From a debt perspective, we back people,” says Cole. “The kind of deals that we look to do are the transactions that have an edge – they have a difficulty to them, which takes them out of the territory of clearing banks and other alternative funders who have a different focus.”

One of the company’s first debt deals was a £125m development loan for Delancey to finance Here East, the private equity firm’s redevelopment of the giant broadcasting centre in Stratford used for the 2012 London Olympic Games.

Tech-driven development

The three-building complex is already home to the studios of BT’s sports channel and will soon house a data centre operated by tech company Infinity, as well as Loughborough University’s first London campus, and a raft of smaller tech and service enterprises.

“Here East is not a development in the traditional ground-up sense,” says Cole. “It’s very different, it’s very innovative, it’s very tech driven. It’s a different type of asset class. You’ve got a number of different uses there. Some of it was part pre-let, part-leased, some of it wasn’t, and that combination puts it into a space where we can add value.”

Cain Hoy deals

Cain Hoy’s largest debt transaction to date – and one of the largest single underwritings in the UK this cycle by a non-bank lender – is a £390m facility for the forward purchase of One and Two Southbank Place on the Thames in central London by Almacantar, headed by former Land Securities executive Mike Hussey and backed by the Italian Agnelli family.

Agreed in October last year, it will finance the 1.5m sq ft redevelopment of the Shell Centre site to provide the oil company with a new headquarters and a speculative office development next to world-class arts facilities such as the National Theatre and Royal Festival Hall.

The development is being carried out by Braeburn Estates, a joint venture between Canary Wharf Group and Qatari Diar. It will draw down capital in tranches throughout the project’s construction before handing the offices over to Almacantar on completion, which is expected to be in 2019.

After the construction period ends, Cain Hoy’s facility will convert to an investment loan of around two more years.

“Those kinds of opportunities, particularly in locations like that in London, are very rare,” according to Cole. “It will be transformational down there. A site of that nature and that location, it’s a one-off.”

The scheme was given the go-ahead in June last year, but a legal challenge to the planning process tied up the development for a year before the Court of Appeal cleared the way for it to finally go ahead six months ago.

“The planning delays were outside everybody’s control, but we all stuck at it,” says Cole. “It’s complex, there are a lot of moving parts, a lot of stakeholders. The complexity of that structure required a flexible financing solution, which dealt with those issues in a way that allowed everybody to get the end result.”

Cole’s team has also just provided a package of €80m debt and €30m preferred equity to developer Cyril Dennis’s Capital & Provident, to refinance two assets brought from Irish “bad bank” NAMA.

The largest – and Cain Hoy’s only investment in Europe so far outside the UK – is One Courchevel, a development of 44 apartments in the French ski resort, which will be run as a Six Senses Residences & Spa. The other asset is a piece of land in London’s Royal Docks near City Airport, called Peruvian Wharf.

Galliard Homes, which has an existing joint venture with Cain Hoy, will be a development partner for this site and will work on obtaining planning consent for a residential scheme. “It’s probably one of the more complicated transactions I’ve been involved in,” says Cole.

Creating more upside

“We usually come at a debt opportunity with a whole loan package, but it just so happens that occasionally there are transactions and opportunities that allow us to add a little further value and create a little bit more upside for ourselves if we can play in different parts of the capital stack. This transaction lent itself to that type of structure.”

Last year Cain Hoy launched a 50:50, £225m joint venture with Galliard Homes to build £1bn worth of mainly residential schemes. Its focus has been on regeneration projects primarily in the South East and has added assets in Canary Wharf, Clapham, Chiswick, Colindale and Cheltenham.

The first project funded through the new venture is 2 Millharbour, a joint venture with real estate fund manager Frogmore, near Canary Wharf. The site has planning consent for up to 901 flats, including more than 200 luxury apartments at the 41-storey Maine Tower, together with a gym, cinema and even a private library.

About a third of the development has been sold to private buyers, a third to US private rented sector specialist Greystar, while the final third has been allocated to affordable housing. As with the One Courchevel and Peruvian Wharf deal, Cain Hoy is bringing both debt and preferred equity to the transaction.

Serious equity returns

“We provided 50% debt on the land,” says Goldstein. “We boosted serious equity returns to the three equity partners, one of whom was us, and now we’re in the process of writing a longer-term development facility of around £100m-plus backed by the private rented sector sale, the private sale and the affordable housing sale.”

Cain Hoy has deployed another £150m in five other debt deals mainly in London and mainly in the residential market in West End locations such as Newman Street, Dean Street and Robert Street.

On the equity side, outside the joint venture with Galliard, Cain Hoy is leading a consortium to develop the £750m The Stage scheme in east London’s Shoreditch.

Investec and Lloyds are providing £190m for Cain Hoy’s Islington Square in North London
Cain Hoy is leading the stage scheme in Shoreditch, on the site of Shakespeare’s Curtain Theatre

The 550,000 sq ft, mixed-use development will include 250,000 sq ft of offices, a 40-storey residential tower and a heritage visitor centre that will preserve the remains of Shakespeare’s 16th century Curtain Theatre, where Romeo and Juliet was first performed, before his company’s move to the Globe Theatre.

Under the deal, freeholder Plough Yard Developments will retain its freehold interest while granting a 250-year lease to the Cain Hoy consortium, which includes Galliard and MG Properties.

Investec Structured Property Finance has provided a debt and equity package for the consortium’s acquisition of the site, which has been valued at around £170m.

“We’re funding the first stage out of a combination of equity and the Investec loan that we put on the side,” says Goldstein. “But we won’t start sourcing the longer-term debt position until next summer, when we’ve got a clearer idea of the construction programme and where the costs are going to be.”

Investec, alongside Lloyds Bank Commercial Banking, is also providing a £190m facility for Cain Hoy and Sager Group’s £400m Islington Square joint venture in north London.

Investec and Lloyds are providing £190m for Cain Hoy’s Islington Square in North London
Investec and Lloyds are providing £190m for Cain Hoy’s Islington Square in North London

Lloyds is lending £100m of the three-year loan with Investec contributing £90m of the facility, which will be used to build the partly pre-let scheme.

The facility reflects a loan-to-cost ratio of around 65%, putting the development cost of the scheme at just over £290m. Cain Hoy is providing about £100m of equity.

The 500,000 sq ft mixed-use development on Upper Street is scheduled to be completed in 2017 and will contain retail, leisure and serviced apartments.

Part of the residential and leisure components, which include a gym and three-screen basement cinema, have been pre-let or pre-sold.

“If you look at where we’ve invested, predominantly in regeneration areas of London – from South Bank, which is certainly not prime, to Canary Wharf, to Islington, to Shoreditch, to Clapham, to Colindale, to Chiswick – we’ve ringed the centre and tried to focus on where we’ve seen growth,” says Goldstein.

To exploit this growth, Cain Hoy has been hiring more staff. Its latest London appointment, announced last month, was Richard Pilkington, hired as managing director. He will work closely with Goldstein on managing existing equity investments and finding new opportunities.

Pilkington has worked in development and investment for 25 years and was previously managing director of Oxford Properties’ UK business.

On the debt side, Tanja Ennsgraber joins as associate director from LaSalle Investment Management, where she dealt in debt investments and special situations, to work with Cole’s lending team.

In July, Robert Allan, formerly assistant director of development at Hammerson, was appointed development director.

At 15-strong, including about half-a-dozen staff in the US, it is a small team, especially compared to the volume of capital deployed, says Goldstein.

American ambitions

“We’re starting a search for a senior person in the US,” he adds. “We don’t need a huge team, because we look at large situations, but to get a few transactions under our belt in the next 18 months would be my ambition in the US.”

Despite being headquartered in the US, successfully repatriating Cain Hoy’s European model back stateside is expected to take up more of Goldstein’s time.

“We need to see how receptive the American market is to the same type of model and same type of approach that we’ve had in the UK,” he says.

As for the success of the UK-based operation, “the next three or four years will show that out, one way or another, because we’re involved in developments that will either show themselves to be good judgement calls or bad judgement calls,” Goldstein says.

“Obviously,” he adds, “we go to bed every night hoping they’ll be good.”