OceanFirst Financial is wasting no time addressing one of the more complicated pieces of its newly acquired balance sheet.
Less than two weeks after closing its $579 million acquisition of Flushing Financial, the New Jersey-based bank is preparing to sell roughly $1.4 billion in multifamily loans tied largely to New York City rent-stabilized properties. The loans make up the bulk of Flushing's exposure to the sector and OceanFirst expects to have them off its books before the end of the second quarter.
The speed of the move is notable but not entirely surprising. OceanFirst had already taken a cautious view of the portfolio before the deal closed on June 1. In investor materials, the bank said it underwrote the rent-regulated loan book with loss expectations at about four times Flushing's existing reserves. It also reduced the portfolio's value by more than 10 percent.
At the time of the acquisition, Flushing carried about $1.4 billion in loans backed by buildings with rent-regulated units. Nearly half were tied to fully stabilized properties, while another 35 percent were secured by buildings in which at least half the units were rent-regulated. The loans themselves were relatively granular, averaging around $1.3 million.
On paper, the credit metrics were not especially aggressive. OceanFirst pointed to a weighted average loan-to-value ratio of 55 percent and a debt-service coverage ratio of 1.7 times, levels that would typically indicate a cushion against stress. But those figures have become less reassuring in a segment where revenue growth is tightly constrained.
OceanFirst had minimal exposure to this corner of the market before the deal—just $27.8 million as of May—so the acquisition represented a significant, if temporary, shift in its risk profile.
The backdrop here is the continued fallout from New York's Housing Stability and Tenant Protection Act of 2019. The law sharply limited landlords' ability to raise rents or deregulate units, which in turn has weighed on property values and refinancing prospects. For lenders, that has translated into a more complicated underwriting environment and, in many cases, a reduced appetite for the asset class altogether.
Over the past several years, a number of community and regional banks have stepped back from rent-stabilized multifamily lending, even as they remain active in other parts of the multifamily market. What was once viewed as dependable collateral—steady occupancy, predictable cash flow—now comes with a different set of constraints that are harder to offset.
Flushing was one of the more active players in that space. As of the first quarter, the bank reported $6.5 billion in total loans, including about $2.4 billion in multifamily. A meaningful portion of that book was tied to rent-regulated properties, making it a defining feature of its lending strategy.
Under OceanFirst, that exposure is already being pared back.
The bank has not disclosed who will acquire the loans or at what pricing, but the outcome will be closely watched. Any discount applied to the portfolio could offer a clearer indication of how the market currently views rent-stabilized multifamily debt—and how much risk lenders believe is embedded in it.
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