The Johnson Companies LP, parent of masterplanned community development's hottest player right now, Houston-based Johnson Development sold an undisclosed percentage of the company to Toronto-based Tricon Capital Group for $18.5 million. The equity investment gives Johnson an infusion of growth capital and succession planning runway, and it yields Tricon an ever-strengthening yield opportunity against the United States housing market's early recovery bright spots.

On background, the deal emerges from a productive and growing project-level partnership dating to 2012. We wrote this past November about Tricon's $50-million-plus investment in Johnson's acquisition of the 2,046-acre "Camp Strake" parcel near The Woodlands.

Motivating Johnson to do the deal right now are two factors: Growth capital and succession planning.

Tricon's announcement release hints at reasons for the first factor:

Johnson is one of the most active development managers of
master planned communities in the United States and the only development manager in the country
to have four communities ranked in the top 20 in 2013 (see chart below)


As for succession planning, Johnson Developments patriarchal leader, Larry D. Johnson has been at it for more than 30 years, and has populated his company with a talented bench of ambitious, entrepreneurial, lieutenants. The idea with the equity infusion is that now Tricon can play a role in a succession planning process that can catalyze growth without damage to Johnson's financial interests nor his signature brand name in masterplanned community development and management.

Driving Tricon--in a meta sense--is belief that U.S. housing, such that it is, is taking a lumpy and choppy route to recovery, calling for laser-focus in investments rather than dispersal across a rising-tide opportunities. Johnson and its formula in Houston and Atlanta, where it is currently operating, are a bright spot in an uneven and, in many areas, perilous investment opportunity set.

Here's what Tricon identifies as the big draws of the deal:

  • Johnson will provide a proprietary investment pipeline that will allow Tricon to continue to grow its Land & homebuilding and Private Funds & Advisory business lines; to date, Tricon has already committed US$27.5 million of its own capital and raised US$247.3 million in third party institutional capital commitments to support Johnson-managed investments since early 2012.
  • A strategic relationship with one of the most active development managers for master planned communities in the United States provides institutional investors with “one stop shopping” in some of the highest growth U.S. housing markets, improving Tricon’s competitive advantage in sourcing third party capital.
  • Johnson earns fee and commission income from in-place development management contracts at 14 active communities it manages; management fees and sales commissions are earned as lots and land are sold, but are not contingent on underlying project-level returns as Tricon is not acquiring an interest in Johnson’s project-level equity positions.
  • Johnson-managed communities achieved 2,720 new home sales in 2013, year over year growth of 32%, and resulted in it being recognized as the Developer of the Year and Humanitarian of the Year from the Greater Houston Builder’s Association.
  • Over the long term, recurring contractual fee income will be generated by the development and sale of over 20,000 residential lots and 1,250 acres of commercial land already under control by Johnson in the Houston MSA. From an earnings perspective, Tricon’s investment in Johnson will be immediately accretive.
  • Company revenue is expected to grow as new communities are brought online and as the national housing market continues to recover; Johnson may look to strategically expand to other major U.S. markets to take advantage of large acquisition and recapitalization opportunities

Tricon has also invested capital with the New Home Company in Northern and Southern California projects and in the Phoenix market with Shea Homes, so look for near-term organic growth, and possibly acquisitions in those markets, which may be considered smart spots for Johnson's brand of highly-amenitized, best-of-breed masterplans.

The deal continues a series of consolidation of power and footprint moves that we've seen as the big, cash-flush players strike where opportunity is both the hottest right now and most sustainable. We'll continue to see and hear of mergers and acquisitions as near-term unit volume and accretive profit opportunities define themselves in an overall fuzzy, challenging marketplace.

Learn more about markets featured in this article: Houston, TX.