Just days after completing its merger with Flushing Financial Corp., OceanFirst Financial Corp. is clearing its books of $1.4B of multifamily loans.
The amount represents the bulk of Flushing’s multifamily portfolio, according to an announcement on Monday. The bank noted that the deal will “importantly” eliminate the majority of its exposure to rent-regulated properties in New York City.
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OceanFirst said it expects the loan sales will be completed by the end of the second quarter.
OceanFirst told investors in a December presentation it had baked significant losses on the portfolio into the deal. To account for risk, OceanFirst assumed losses about four times larger than Flushing's existing reserves and shaved more than 10% off the value of its rent-regulated apartment loan portfolio in its underwriting.
At the time of the presentation, Flushing held $1.4B of debt backed by properties with rent-regulated units, with an average loan size of $1.3M. Of those, 48% were tied to fully regulated buildings, 35% were between 50% and 99% regulated, and 17% were less than half regulated.
It is unclear whether the sale only includes Flushing’s rent-stabilized portfolio or if other loans were involved. Additional details, including the buyer and price, were not revealed.
OceanFirst called Flushing’s rent-regulated portfolio “low risk” in its December presentation. The book’s weighted average loan-to-value ratio, based on appraisal at origination, was 55%. Its weighted average debt coverage ratio, based on annual loan reviews, was 1.7x.
Long Island, New York-based Flushing held $6.5B of loans at the end of the first quarter. Approximately $2.4B was backed by multifamily real estate.
Like many other regional and community banks, Flushing has historically loaned heavily to New York City’s rent-regulated housing stock. Such buildings were viewed as stable investments before the Housing Stability and Tenant Protection Act of 2019 altered the economic underpinnings of the assets.
The rent reforms eliminated ways that landlords could deregulate apartments and raise rents. Meanwhile, operating costs skyrocketed, causing property values to drop. As a result, lenders have vanished from the market.
Last year, Flushing President and CEO John Buran told Bisnow the bank had walked away from deals since HSTPA’s passage, but that it was “not neglecting multifamily.” Following the acquisition, Buran joined OceanFirst as nonexecutive chairman of the board.
New Jersey-based OceanFirst’s portfolio totaled $11B, roughly half of which was tied to commercial real estate, according to the company’s first-quarter results.
OceanFirst’s New York City rent-regulated loan book totaled $27.8M, according to a May investor presentation.
The $579M acquisition of Flushing was OceanFirst’s largest yet, adding roughly $9B in assets. The deal, which closed June 1, makes OceanFirst a $23B lender with more than 71 branches across the region.
As part of the merger, Warburg Pincus invested $225M, giving the private equity firm a 12% stake in OceanFirst and a seat on the board.
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