SPECIAL FOCUS: AFT'S TOP 50 MULTIFAMILY LENDERS

APARTMENT FINANCE TODAY • FEBRUARY 2008

The Power of One

Guy Johnson’s conservative approach paces Johnson Capital’s continued expansion.

By Jerry Ascierto

Guy Johnson knows what it’s like to be part of a dying breed.

The founder and president of Johnson Capital runs one of the few, and one of the largest, independent lending shops left in an industry characterized by consolidation.

The last two years have seen a litany of government-sponsored enterprise lenders—such as ARCS Commercial Mortgage, Collateral Real Estate Capital, Reilly Mortgage, and American Property Finance—acquired by larger institutions.

But Johnson Capital is conspicuous by its continued independence. “Our peer group continues to disappear and be gobbled up by major financial institutions,” said Guy Johnson. “It makes us that much more unique.”

The company has steadily grown over the last 20 years to become one of the largest debt and equity providers in the nation, ranking 21st on APARTMENT FINANCE TODAY’s Top 50 list, with almost $1.5 billion in multifamily volume in 2006. And if recent history is any indication, the company will continue its expansion well into the future.

Independent streak

Guy Johnson’s independent streak dates back to the founding of the company, which was funded exclusively by Johnson.

Johnson Capital started life in the early 1990s as LJM Realty Advisors, a spinoff division of mortgage company L.J. Melody & Co., where Guy Johnson was a principal. In 1996, several years after the spinoff, L.J. Melody was sold for $15 million and became the capital markets group of CB Richard Ellis.

Johnson wasn’t interested in sticking around for the sell-off: He was in his early 30s and more interested in making his own mark. So he bought out his partner, Larry Melody, and chose to blaze his own trail with L.J. Realty Advisors, later renamed Johnson Capital.

“He was young, and it was a great opportunity for him,” said Larry Melody, founder of L.J. Melody and current chairman of CB Richard Ellis/Melody. “Guy’s done a remarkable job starting his own operation, staffing up, and going national with it, kind of what I did 20 years earlier. I’m very proud of the job he’s done.”

All of the money used to establish the company came straight out of his pocket, and in the last 20 years, Johnson has never taken any money from outside interests to help grow the business. “There hasn’t been any family money or borrowed money or partners’ money,” said Johnson. “We’re debt-free, and we don’t have any preferred interest or preferred debt or any other obligation.”

Johnson picked a difficult time to strike out on his own. In the late 1980s and early ’90s, a recession, combined with the savings and loan scandal, had thrown the lending industry for a loop.

But Johnson viewed that period of crisis as a time of opportunity, hiring many industry veterans with deep roots in the industry. “Our greatest growth occurred during the last major disruption of the capital markets,” he said. “It was a chance for us to acquire talent more easily.”

The company has been steadily building momentum ever since.

Measure for measure

From 2000 to 2004, the company diversified its product lines, becoming a Freddie Mac lender for California, Arizona, and the Mid-Atlantic region, and opening offices in Manhattan, Washington, D.C., and Connecticut. The company also became a Federal Housing Administration and Ginnie Mae lender in 2003 when it acquired CBA Huntoon Hastings.

The last two years have also been a time of expansion. Johnson Capital opened new offices in Dallas; Kansas City, Kan.; Little Rock, Ark.; Encino, Calif.; and Vail, Colo., bringing the company’s office count to 19.

In 2006, the company went beyond national borders, establishing Johnson Capital International and opening its first international office in Cabo San Lucas, Mexico, with plans to stake a claim in India as well.

It’s not just the company’s geographic reach that’s expanding. In 2005, the company opened Johnson Capital Express, its small loan division, and last year, it opened a division focused on providing capital to the hospitality industry.

This growth has proceeded at a measured and conservative pace—a fitting approach for a company run by a former accountant. “We could have grown a lot more by taking on more risk and more leverage, but I was always concerned about a market change like we’re having today,” Johnson said.

Full circle

Johnson’s strategy of investing in agency lending platforms earlier in the decade, when conduit lenders were booming, has paid off handsomely.

Johnson Capital estimates its Freddie Mac volume will reach $500 million in the second half of 2007 alone—more than its entire Freddie Mac production for 2006. “This is a very good time to be an agency lender,” said Johnson. “Our volume has escalated enormously this year, especially with the absence of the conduits in the second half of the year.”

Johnson called the emergence of the market for commercial mortgage-backed securities (CMBS) in the mid- ’90s the biggest industry change he’s witnessed. Mortgage bankers suddenly lost their status as the exclusive point of contact for capital. Anyone could bring business to the conduit lenders, who didn’t care whether you were a mortgage banker or broker, whether you had a servicing department or were a one-person shop.

But the industry has come full circle since the CMBS market went south in mid-2007. Companies that relied heavily on the CMBS market are suffering while more traditional lenders are profiting. “This once again returns to the importance of representing portfolio money and having servicing,” Johnson said.

In addition to agency products, Johnson touts the company’s servicing business, which totals more than $2 billion in agency loans, as well as another $2 billion in other platforms, as a stabilizing force.

In all, the company’s deep roots in the industry and personal touch in assisting clients even after the deal is closed make it stand apart from its peers, according to developers.

“One of the distinguishing factors is that they remain involved and assist us after the debt placement is closed, and they welcome complex debt-related issues,” said Paul Sevieri, vice president of finance at multifamily developer Berkshire Property Advisors. “Their lender knowledge and relationships enable them to add considerable value to the debt-placement process.”

Looking forward

Johnson expects that credit conditions will remain tight through the first quarter of 2008, and lenders will return to more historical underwriting criteria. But he believes the credit crunch has been overstated for the multifamily industry, especially given that existing properties continue to perform well.

“The fundamentals of the market were and are still better than what the credit markets are suggesting they are,” he said. “But in the long term, this is a good thing for the marketplace in that it slowed down the market before it got insane.”

Johnson views the current turbulence in the capital markets as an opportunity. The company’s advisory services have become more popular of late, especially with borrowers who took out favorable interim loans a year or two ago, but are now having trouble converting to permanent loans.

“A hot market for us is a market with distress, where people need expertise to find competitive capital,” he said. “It makes us all the more valuable as problem solvers. We’re more popular today than we’ve ever been.”