When iStar Financial Inc. announced its plan to snap up the commercial real-estate lending business from Fremont General Corp. last spring, the deal was applauded as the latest coup for Jay Sugarman, who over 10 years had built iStar from a start-up into a real-estate financing powerhouse with a solid credit record, Wall Street Journal reports.
Instead, the deal has proved toxic, putting a stain on Mr. Sugarman’s reputation and a cloud of uncertainty over the company. Most immediately, it burdened iStar with a $1.3 billion bridge loan that comes due June 30 amid the most perilous credit environment in decades. Longer term, the deal loaded iStar with billions of dollars of construction loans and funding commitments to condominium developers, the kind of assets that have higher chances of default in today’s housing crisis.
IStar’s stock has plummeted almost 70% since it closed the Fremont deal in July. With default risk rising, it has been forced to increase its reserves for future loan losses to $185 million at the end of last year from $14 million in 2006. “It’s a high-risk story,” said analyst David Fick at Stifel Nicolaus, noting that the biggest concern is that “they will not get enough money from repayments on its existing loans to meet their funding commitments and service debt.”
IStar appears to have enough capital to weather the credit storm that has crippled many financial institutions. The New York firm expects to have a cushion of $1.7 billion in capital at the end of 2008 that could be used to offset any shortfall in repayments on its loans.
Mr. Sugarman acknowledges that critics have “a fair point” when they say iStar placed its bet too early. But, he said, “being a contrarian sometimes means being early” and predicts, “we’ll end up making a positive return on the deal.”
IStar’s primary business is making and holding commercial real-estate loans, typically in amounts from $20 million to $150 million. It also buys office towers and other facilities and leases them back to corporations. IStar started in 1993 as part of the Starwood Capital Group, Barry Sternlicht’s private-equity firm specializing in real-estate investments. The company — then called Starwood Financial — was the brainchild of Mr. Sugarman, who had managed investment funds for the Burden family, a branch of Vanderbilts, and the Ziff family before forming the company.
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