Q&A: The Zelman Investment Banking Team on Helping to Make the Sumitomo-JPI Deal Successful
Sumitomo Forestry Co.’s acquisition of Dallas-based JPI in late 2023 catapulted the Japanese firm into the top 10 of U.S. apartment developers. Serving as financial advisors on the $215-million acquisition was a team from Zelman, a Walker & Dunlop subsidiary. As Zelman’s Tony McGill, Senior Managing Director and Head of Investment Banking and Alex Virtue, Managing Director of Commercial Real Estate, told Connect CRE, the deal was built on the relationships that Zelman and Walker & Dunlop have established over time with both parties. However, it wasn’t without its complications. Here’s what they told us:
Q: What were some of the key pain points in completing this transaction? How did the Zelman Team work to overcome them?
McGill: Thinking about it from a multifamily developer-owner’s perspective, if you’re set up like most are, there are two layers. You have an entity that serves administrative functions, houses employees, raises capital and performs operational services for real estate projects, and then you typically have individual real estate projects that are uniquely capitalized with different lenders and equity ownership groups. Sumitomo happened to be an existing project-level equity investor in four JPI projects beginning in 2019. What really differentiates this transaction from the sale of a single asset or a portfolio of buildings trading hands is that Sumitomo, as an investor, elevated its investment with JPI from project-level to entity-level. So, now Sumitomo is both a project-level investment partner in active JPI developments as well as majority owner of the JPI management entity itself.
Embedded in that entity / project-level structure are areas that can create challenges in a transaction where you’re buying into an operating company. That operating company has employees, so there’s practical and legal human resource dynamics, there’s technology systems, office leases, post-transaction integration planning that has to be tackled at the transaction structuring stage. There were a couple ways that we worked through some of these areas. One was that JPI had performance credibility: given Sumitomo’s ongoing project-level investments it was able to witness first-hand JPI operating proficiencies and ability to generate returns, proving itself to be very institutional quality. The JPI organization is led by a seasoned management team with institutional backgrounds, and staff capabilities that could really perform and execute at a level more akin to a large public REIT rather than a typical private developer. So JPI overcame it by being good at what it does.
And equally as important, Sumitomo was able to undertake the project- to entity-level transition by having an investing philosophy measured in decades and longer, rather than days or months or even years. In executing that very long-term investment strategy, Sumitomo has completed approximately eight to 10 M&A transactions in the US housing sector since the great financial crisis, JPI being the most recent one.
Q: The Zelman Team had existing relationships with both parties. How did these existing relationships prove advantageous in reaching a deal?
McGill: We have longstanding working relationships with both parties. Our investment banking team has worked on M&A transactions where Sumitomo acquired companies that Zelman advised on the sell-side, and we have also worked directly with Sumitomo as its buy-side advisor when it acquired Crescent Communities. Our investment sales team has brokered numerous stabilized assets for JPI over time and our CRE debt and equity finance teams have raised development, construction, bridge and permanent capital for JPI projects for many years.
With respect to the JPI transaction specifically, what was most important in my view is our very deep industry expertise, our long history of executing so many entity M&A and financing deals, and our market-leading investment sales and CRE finance teams that, when taken together, enabled us to provide Sumitomo with very comprehensive buyside advisory service. There are countless investment banks and CRE brokerages that, in theory, could have helped Sumitomo with one part of this transaction or another, but there is absolutely no firm capable of bringing all of the necessary disciplines together in a comprehensive and client-friendly way as we did.
As a buyside advisor, if your investment bankers have significant M&A experience in the industry then you have proprietary knowledge of transaction comps that are essential for multiples-based enterprise valuation analysis; if you have internal investment research that tracks and forecasts the multifamily industry locally and nationally, then you have a proprietary view of the future against which you can analyze projected growth rates and profitability (of JPI); if you have investment bankers in the capital markets actively executing entity-level equity and debt deals – for example IPOs, public debt, private equity – then you understand the availability and cost of capital that is essential to determining discount rates that are needed for corporate cash flow discounting; if you have internal investment sales professionals on the ground to analyze prevailing property-level transaction comps and cap rates, then you have a real-time pulse of property-level valuation; and if you are the #1 leading CRE finance firm to multifamily, then you have unique knowledge and perspective relating to cost and availability of capital to finance projects that underpin entity-level cash flows. These are the differentiating attributes that define Zelman and Walker & Dunlop’s comprehensive advisory capabilities.
Virtue: It’s also a matter of trust. So, in addition to having the familiarity and the track record, the trust that the client was able to place in the team and in Zelman and Walker and Dunlop was certainly helpful in that regard.
Core to our DNA, and in our successful working relationships with Sumitomo and JPI, is our ability to provide unconflicted, world-class advice that draws from our holistic project-to-entity-level capabilities, hands-on involvement from our veteran dealmakers and our commitment to professionalism, character and integrity for our clients. This is a perspective that we, and the entire Walker & Dunlop organization, strive to bring to every client discussion – that is, providing expert advice that is agnostic in terms of the path of execution, but that provides the best possible outcome for our clients.
Q: The team has advised Sumitomo on numerous M&A transactions in the past. How was the JPI deal comparable with previous transactions, and how was it unique?
McGill: It took a long time. It took longer than usual because it was more complex than usual—one of the more complex transactions that we’ve worked on. I think if you talk to the Sumitomo team, they would say the same thing. There are different layers that matter. And it has to do with the general structure of how multifamily developers set themselves up. Because you have the ownership group, which is usually a small handful of people who actually own the equity in the entity, and that group is different than the managers actually running day to day. Then you have all of the actual assets with disparate ownership groups, the buildings halfway built or about to be built or stabilized and targeted for disposition. You have all of that underneath the corporate structure. You see the owners at the very top, then the managers who actually run the business and then at the property level, you have various, different equity owners. They all have a generally similar set of objectives for returns on their capital, but there are nuances to their objectives. That’s probably the basic framework for why it was so complex and the documentation supporting the execution we very substantial.
Also, because this transaction was structured primarily around the operating company rather than the assets themselves, it had to go through Hart-Scott-Rodino review, which is very unusual for real estate transaction. After all the hard stuff had been sorted out with valuation and transaction structure and aligning post-deal incentive compensation structures, then the legal teams focused on addressing regulatory approval, which in the end, did not present any hurdles to a successful closing.
Q: Finally, do you anticipate advising on more entity-level acquisitions in 2024 (not necessarily involving Sumitomo)?
Virtue: 2023 was incredibly frustrating for most of our industry. Given the impact that higher borrowing costs have had across sectors, including the multifamily sector, I think a lot of folks went into 2023 thinking that it would be a year of distressed opportunities where some of the more thinly capitalized developers, operators, owners would be forced to capitulate and lenders and equity investors would be looking for recapitalization capital. Most of that did not transpire.
I don’t think it’s a stretch to say that we feel that there will be more activity in 2024. That certainly is true both at the property level as well as the entity level. We’re in the market talking to our clients every single day about potential opportunities, including other offshore groups. This transaction has certainly put a spotlight on what Sumitomo did, and a lot of the big Japanese corporate owners that have a presence here in the U.S., investing in multifamily real estate and housing in general, have taken note of this transaction and are interested in and looking at similar opportunities. For all those reasons, we see the opportunity for more transactions in 2024.
McGill: That’s especially true from a forward-looking perspective, if the rate path continues where it’s at and there aren’t major surprise changes in policy. You don’t necessarily need to think that everything is going to turn back to perfect in 2024, but you can look through ‘24 to 2025, maybe even a little bit further out to try to get to a more normalized view of fundamental and there should be a good level of increased deal flow as the markets have a clearer view to the rate environment and economic conditions going forward.
Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 16-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 7-10 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces.
Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications.
Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).