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Fishers-based First Internet Bank plans to sell up to $869 million of its loans to New York City-based Blackstone Inc.—the largest single transaction in First Internet’s history.
It is not uncommon for banks to sell off the loans they originate—such a transaction can be a way to free up capital that a bank can then use to make new loans. But First Internet has never sold off such a large pool of loans in a single transaction, said First Internet President and Chief Operating Officer Nicole Lorch.
“We are no strangers to selling loans, but we have never done a transaction of this size … so this is a very significant transaction to our organization,” Lorch told IBJ about the deal, which the companies announced Sept. 10.
All of the loans to be sold are single-tenant lease financing loans—financing for retail properties occupied by a single retail tenant such as a national or regional restaurant chain, drug store or convenience store.
One big reason for the transaction, Lorch said, is that the loans being sold are fixed-rate loans that were originated when interest rates were lower. The average interest rate for the pool of loans is just over 5%, she said. If those loans were originated today, they would carry interest rates somewhere between 6% and 7%.
Selling the lower-interest-rate loans provides capital that First Internet can use to originate new loans at higher interest rates.
Blackstone Real Estate Debt Strategies, the Blackstone business segment that is purchasing the First Internet loans, is paying about 95% of the value of the unpaid loan balances.
As part of the deal, First Internet will continue to service the loans for Blackstone, earning a fee for doing so.
Once the transaction closes, which the bank expects to happen later this week, the divestiture will take First Internet’s total loan portfolio from its current $4.3 billion down to $3.5 billion. The divestiture also offloads the majority of the bank’s single-tenant lease financing loan portfolio, taking it from $971 million down to $101.6 million.
Single-tenant lease financing is a specialty of First Internet, and Lorch said the loan sale is not a sign that the bank is getting out of that line of business.
“It is a niche product for us,” she said. “It’s something that we are an expert in doing, and we have no intention of backing away from it.”
First Internet shares closed at $24.38 each Friday, up 1.9%.
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The risk of holding on to fixed rate loans. Wonder how many are underperforming or for risky locations like pharmacies that are rapidly retrenching.
Most of the drug store leases continue to be paid even when the store closes (except those in bankruptcy). They probably also have a significant number of medium box stores (i.e. Dollar General…and they close very few of those).