iStar Buys Fremont's Commercial Loan Biz for $1.9B

Jay Sugarman, Chairman and CEO of iStar FinancialFremont General Corp. (NYSE: FMT) will sell its commercial lending business in an all-cash transaction valued at $1.9 billion to New York-based REIT and finance company iStar Financial (NYSE:SFI). The move will significantly expand iStar's construction and direct origination platforms.

iStar has been sizing up Fremont and carefully jockeying for position with the lender for a while now. Before the subprime shakeout, the REIT bought a small pool of high-quality loans in the first quarter with Fremont's commercial group. As some of the issues surrounding the subprime business started to surface, iStar took a deeper look at its commercial platform to see how it could be integrated with its own and then it pounced, said Jay Sugarman, chairman and CEO of iStar. "It follows a pattern we've established in other past strategic moves: get a closer view of actions and identify a way to capitalize on that opportunity and capture larger opportunities when the timing seems right," he said.

The acquisition will give iStar loan origination capabilities in six new regional markets: Atlanta, Bethesda, MD, Chicago, Dallas, Phoenix and Southern California. iStar will also be able to build upon Fremont's stronghold of construction and senior lending, adding access to mezzanine, corporate or corporate tenant lease capital to borrowers.

The deal comes as Fremont (NYSE: FMT) tries to dig its way out of the rubble from the subprime aftermath -- its subsidiary Fremont Investment and Loan, a California-chartered bank originates subprime residential real estate loans in addition to commercial real estate loans.

Last month, Fremont announced plans to sell its residential real estate business to hedge fund Ellington Capital Management. It has also sold about $7 billion in loans over the past two months. iStar will continue to have no exposure to the subprime sector. When this deal closes, Fremont will be left with its retail-banking unit.

As part of the deal, iStar (NYSE: SFI) will retain a 30 percent B-participation interest in Fremont's $6.5 billion portfolio of commercial loan assets. That B-piece, which has a $2.1 billion principal balance, will give it the first loss position in the portfolio and iStar will assume all loan servicing and management responsibilities for the portfolio. Fremont General will own a 70 percent A-participation interest in the portfolio.

In addition, iStar will fund about $4.4 billion of existing unfunded loan commitments tied to the portfolio. Fremont's commercial loan portfolio totals about $10.9 billion.

The portfolio carries some risk, with about 13 loans totaling about $400 million and representing about 3.7% of total commitments, considered non-performing, according to Fremont. iStar estimates that the NPL list actually encompasses about 21 loans with a total of $840 million in principal outstanding -- and that list could grow.

The difference between the two company's assessments of potential non-performing loans stems from different underwriting practices of the watchlist assets, said CFO Catherine D. Rice. "They have a different criteria for what we'd consider watchlist assets. They had a more defined and less proactive way of looking at potential problems in the portfolio," she said in an investor conference call. "We've reviewed each asset and there are about 21 loans we'd put on our watchlist. In a proactive way, we look at an asset and we foresee future issues, we want to watch it and work with that borrower."

That watchlist will likely grow beyond the 21 loans, mostly due to the high number of condominium construction and conversion financing deals in the portfolio. iStar will place about $210 million of the discount purchase price into its reserve at closing to cover that, and may add additional reserves.

"Some of the things Fremont might have provided, we might cut back on. There are other things that we can provide that Fremont couldn't. There will be a change in the mix. We are not a volume-based shop; we're a risk-adjusted return shop. We want to give the borrowers the tools and go back with the best risk-adjusted opportunity. Whatever we may lose by turning down the dial on some parts, will more than be made up by giving additional tools," Sugarman said. He also added that the underlying real estate in most of the transactions was very good.


Fremont's current portfolio looks consists entirely of first mortgages, with a weighted average loan-to-value of 72%. The collateral assets are mostly apartment and residential assets that are broadly diversified by geography and borrower, though the portfolio runs the gamut of property types. The average committed loan size is about $35 million.

iStar will finance the transaction with $2 billion in incremental interim financing, consisting of $400 million in equity and the remainder in unsecured debt. Following the closing, which is slated for early summer, iStar plans to replace the interim financing with an issuance of debt and equity securities. It will also add incremental unsecured credit facility to fund future growth.


News of the acquisition had a favorable effect on both stocks. Fremont's stock soared throughout the day, up about 43.74% to $10.22 over yesterday's close in late afternoon. iStar's stock was up to about $48 late afternoon, compared to an opening price of $45.83 today.

In other company news, an investor group led by Gerald J. Ford, the former CEO of Golden State Bancorp, has acquired a minority interest in Fremont, through a combination of about $80 million in preferred stock and warrants to acquire additional common stock.

Ford's group could end up with a 20% stake in the company. As a result, Ford has been named Chairman of the Board of Fremont and its affiliated bank. Joining Ford are fellow former Golden State executives Carl B. Webb, who was named CEO of the company, and J. Randy Staff, who will become Fremont's CFO.

"These transactions provide a major turning point for Fremont General. The transaction with iStar allows us to exit our existing commercial real estate lending business while retaining an earning asset that provides a bridge to the development of new lending businesses," said Louis J. Rampino, Fremont's CEO, in a statement.


"The investment led by Mr. Ford will provide part of the foundation to building these new businesses." Ford plans to build new lending businesses around Fremont's existing retail deposit business, Rampino added.

Commercial loans