Cain International’s Eric Poretsky Talks New Opportunities in the Post-COVID Market

Commercial Observer: Are you back in the office today?

Eric Poretsky: I’m based in New York and, fortunately, I’ve been able to be back in the office now [at 350 Park Avenue] on a fairly regular basis, which has been great. I think we’re particularly fortunate, because our offices are designed in a way where we don’t need to split into A and B teams, so people are back and collaborating. Cain’s view on this, and I certainly echo this, is we’ve got to get back to work. Our business is a people business, and a people business does not work remotely.

What have the last seven months been like for you, from a business perspective?

I actually traveled the first week in March; I was in three different cities and attended two different conferences. I watched the trend and progression, and the increasing news velocity around COVID-19. I was at our office in Beverly Hills when we had our first meeting around how we were going to adjust to the COVID-19 environment. Cain repositioned what we were doing in the marketplace to say, “Look, we’ve got to focus on our existing portfolio, first and foremost.”

We had some operating assets that needed immediate attention — as to how they were going to be impacted by COVID-19 and how the capitalization was going to work — and we had to make some decisions that were tough. We have a large investment in a sports business down in the D.C. area, The St. James, and we had to make the decision to shut that business down, given the restrictions being put in place.

So, we spent the better part of two to three months specifically focused on our portfolio. But, then, I think like everybody else, we started to look around more aggressively and say, “What does the opportunity look like now? And how do we start to think about deploying capital in a new environment?”

Obviously, we’re still seeing the impact of the pandemic today with the resurgence that’s going on, but from our point of view, we continue to believe that if we have high-quality assets, high-quality sponsorship, and we appropriately capitalize our deals, we will see opportunities on the other side, recovery in the assets that we’ve invested in and, frankly, a lot of opportunity to deploy capital in this market.

So, your portfolio has fared pretty well during the COVID-19 shutdown?

We have a relatively new portfolio. We only started investing in the United States in 2016. Jonathan Goldstein formed the business in 2014 out of the U.K., really originating out of a debt business, and then growing into making equity and private equity investments in real estate and operating businesses. The intent to grow into the U.S. was always part of the long-term strategy, and a number of the opportunities we saw early on were really development opportunities. We had a focus on major gateway markets, on really exceptional locations, and on assets that are hard to acquire in existing markets and really have long-term value so they can withstand cycle risk.

So, we were quite fortunate that the investments we made in ‘17, ‘18 and ‘19 were in the development space, and even more fortunate that many of them are not delivering right into this market. So, we proceeded through the development plans.

We have three active projects in construction down in Miami, and they never shut down construction sites there. In Boston, we had about a six-week shutdown of our construction site; obviously, that delays the business plan, but it didn’t really pull us off course from a major point of view. As I alluded to earlier on our operating assets, it was really about assessing how we were going to fare, and how we can best mitigate the exposure that COVID-19 had, and try to find what opportunities could exist. The St. James is a half-a-million-square-foot sports and wellness property, anchored by large sporting fields. We had to shut down, but we immediately started asking “What’s our reopening plan?”  Our reopening plan there was focused on the fact that we have more space than any gym in the region, maybe even in the East Coast. So, we had the ability to invite people back into our facility and give them a safe ability to be health focused.

One thing that has come out of COVID-19 is people’s realizations about being healthy and maintaining that wellness lifestyle, and we really retooled the business. We opened only initially to members, and really adjusted our operating model to be able to meet the market demand that we’ve seen today. And it’s paid off. Since early September, we’ve been fully operational across the facility, we’ve had major teams back using it, and we’ve also opened up [membership] sales again.

Have you altered your investment strategy post-COVID-19 shutdown?

I think that we’re being cautious, appropriately. In terms of looking at new investments, as we were building this business out in the U.S. specifically, the focus had been on getting into these larger gateway markets, and aligning ourselves with development partners and sponsors that can help us build the platform in major markets around the country. Starting in 2019, we started to begin building a debt position, and that was really the opportunity we were looking at in 2020, even pre-[pandemic], and I think COVID-19 only accelerated that. So, when I look at how we’re identifying assets and opportunities in 2020, it really is with a debt focus in mind.

What I think is actionable in the next 12 months is, “How do we deploy capital in the credit side of the business?” Whether that be in senior mortgages and construction loans, where the market has moved. We’ve seen pricing stretch out just because of the risk profile in the world right now. You’ve seen a lot of the traditional players pull back and create some liquidity shortfalls. There are developers who are overleveraged in assets because income profiles have changed. What’s really emerged so far is that a number of the lenders have been forgiving and created forbearance and things like that. I think that comes to a head in the next three to six months more dramatically, and we will see opportunities to help recapitalize assets and deploy capital.

What is the biggest opportunity you’re seeing on the debt side today?

There are a number of different opportunities. What we’ve spent quite a bit of time on over the last few months is construction loan opportunities, where lenders aren’t lending into this market because they’re concerned about what the future of cities holds. We’ve also seen opportunities on more complex capital stacks, where there are areas that need to get restructured and recovered.

So, by way of example, there’s a project in New York City, a large office stack with a more-than-billion-dollar capitalization and some liquidity shortfall within the stack. The developer is looking to raise preferred equity, with debt-like features. That’s an opportunity we can take advantage of and we can get pricing that, in a pre-COVID-19 market, would have looked very different and, frankly, attracted a much wider group of lenders.

Another thing I expect to see even more of is distress in terms of hospitality assets. I think there’ll be an opportunity there, as well as loan sales and opportunities on that side. I also think there’s an opportunity to finance other debt buyers.

What differentiates Cain from its competitors in the industry?

I think we’re unique, because we’re able to deploy capital across the capital structure.

In terms of assets, we leverage the strengths we’ve always brought to the table; we’ve been investors in hospitality, in residential, in commercial office, and in really large, urban, mixed-use complex projects. We’ve never been an investor in commodity real estate. We’ve found that commodity real estate is more affected by the down cycle, it’s easier to build and in low barriers-to-entry markets.

Take our project in Boston, which is the development of the Raffles Hotel and Residences in the Back Bay, as an example. This was a project that we closed in July of 2019. We liked it because it had both hospitality and residential, plus retail and entertainment components and — besides having diverse uses — that gives some downside protection in cycles. This is as central of a location as you get, and so when we look at an asset like that, we’re excited about what it affords from an opportunity perspective.

As an office owner, what are you seeing in terms of tenant activity?

I think the strongest landlords are able to hold firm, but the reality of the office market is that office leasing volume is substantively down. Tenants are, for rightful reasons, really looking to stay in place, renew, and not necessarily expand until they determine what the future looks like. So, I think what you’re seeing landlords do more than anything is offer higher concessions.

At the same time, we have an asset down in Miami, which is an office tower being built in its early days still, coming out of the ground. But we’ve seen an uptick in activity from major financial technology companies looking to grow their footprint in Miami. And, because we’re building best-in-class product, it will have all the features that you would want to see, in terms of touchless entry and smart spacing. So, that type of asset will still generate premium rent, and we haven’t seen a need to be overly concessionary to tenants at this point because they’re still willing to pay. But there’s no doubt that in New York and other urban markets, older Class A and Class B product is going to suffer.

What was your career path to Cain?

I touched real estate back when I was an intern in college, when I worked for Tishman Hotels and Tishman Realty. The first day I showed up in an office, I was sent to what is now the Ritz Carlton Battery Park City for an asset management meeting and was told, “Just go listen and see what happens.” Which goes back to why we all need to work in person, because you can’t do things like that when you work remotely.

I went to Haas School of Business [at the University of California at Berkeley] out on the West Coast, and I worked for Starwood Capital [Group] for a number of years, across acquisitions and asset management, and through the great financial crisis. So, I really saw Barry [Sternlicht] pivot and restructure the business.

Leaving Starwood, I worked for a distressed credit fund called Strategic Value Partners, doing distressed debt for a number of years. We were quite active post-[financial] crisis, buying up distressed real estate around the country.

When I left SVP, I joined Steve Witkoff and worked for the Witkoff Group for a number of years. Everyone who works with Steve does a little bit of everything, and I really got my hands dirty in development. I think that brings a different perspective. Working for a sponsor, and seeing the execution of an asset, and really what it takes to move an asset, you know, from a business plan on a piece of paper to actually, you know, getting under construction and building, gives a very different perspective.

And then, I met Jonathan, as he began investing in the U.S. in 2016, and joined him. It’s been four years now!