UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 31, 2001
--------------
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 1-15049
-------
FBR ASSET INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873198
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
Potomac Tower (703) 469-1000
1001 Nineteenth Street North (Registrant's telephone number
Arlington, Virginia 22209 including area code)
(Address of principal executive offices)
(zip code)
N/A
(former name)
Indicate by checkmark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days:
Yes: X No ____
-----
As of May 4, 2001, the latest practicable date, there were 3,472,527 shares of
FBR Asset Investment Corporation's common stock outstanding.
FBR ASSET INVESTMENT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1 - Financial Statements and Notes
Statements of Financial Condition as of March 31, 2001
(unaudited) and as of December 31, 2000.................................................................. 1
Statements of Income for the Three Months Ended
March 31, 2001 and 2000 (unaudited)...................................................................... 2
Statements of Changes in Shareholders' Equity for the
Three Months Ended March 31, 2001 (unaudited), and the Year
Ended December 31, 2000.................................................................................. 3
Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 (unaudited)...................................................................... 4
Notes to Financial Statements............................................................................... 5
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................................... 8
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk................................................ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 17
Item 2. Changes in Securities and Use of Proceeds........................................................... 17
Item 3. Defaults Upon Senior Securities..................................................................... 17
Item 4. Submission of Matters to Vote of Security Holders................................................... 17
Item 5. Other Information................................................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................................................... 17
SIGNATURES......................................................................................................... 18
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND NOTES
FBR Asset Investment Corporation
Statements of Financial Condition as of March 31, 2001 (unaudited) and December
31, 2000 *
================================================================================
As of March 31, 2001 As of December 31, 2000
-------------------- -----------------------
(unaudited)
ASSETS
Mortgage-backed securities, pledged as collateral, at fair
value $ 132,394,848 $ 144,867,416
Mortgage-backed securities, at fair value 16,527,923 9,980,789
Cash and cash equivalents 10,910,654 36,810,566
Investments in equity securities, at fair value 40,975,449 28,110,190
Notes receivable 12,000,000 4,000,000
Dividends receivable 179,179 818,728
Prepaid expenses and other assets 135,233 221,628
Interest receivable 851,842 994,750
------------- -------------
Total assets $ 213,975,128 $ 225,804,067
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 125,957,000 $ 133,896,000
Interest rate swap 55,694 --
Interest payable 1,137,873 844,841
Dividends payable 2,083,516 3,731,911
Management fees payable 195,827 78,727
Accounts payable and accrued expenses 121,132 237,218
Other 118,681 174,786
-------------- -------------
Total liabilities 129,669,723 138,963,483
-------------- -------------
Shareholders' Equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized -- --
Common stock, par value $.01 per share,
200,000,000 shares authorized,
10,415,827 shares issued as of March
31, 2001, and December 31, 2000, respectively 104,158 104,158
Additional paid-in capital 194,239,693 194,097,193
Accumulated other comprehensive loss 6,909,931 (748,691)
Retained deficit (21,980,798) (19,978,632)
Treasury stock, at cost, 6,943,300 shares
And 6,531,400 shares as of March 31,
2000 and December 31, 2000, respectively (94,967,579) (86,633,444)
------------ ------------
Total shareholders' equity 84,305,405 86,840,584
------------ ------------
Total liabilities and shareholders' equity $213,975,128 $225,804,067
============ ============
================================================================================
*The accompanying notes are an integral part of these statements.
1
FBR Asset Investment Corporation
Statements of Income for the Three Months Ended March 31, 2001 and 2000
(unaudited)*
================================================================================
Three Months Ended March 31,
------------------------------
2001 2000
--------- -----------
(unaudited) (unaudited)
Income:
Interest $2,979,453 $ 5,613,578
Dividends 200,067 709,750
---------- -----------
Total income 3,179,520 6,323,328
---------- -----------
Expenses:
Interest expense 1,903,944 2,972,809
Management fee expense 332,975 357,230
Professional fees & other expenses 249,941 260,377
---------- -----------
Total expenses 2,486,860 3,590,416
---------- -----------
Realized (loss) gain on sale of available-for-sale equity securities (19,975) 615,885
Realized gain on sale of mortgage-backed securities, net -- 92,679
Recognized loss on available-for-sale equity securities (544,880) (5,569,668)
---------- -----------
Net income $ 127,805 $(2,128,192)
========== ===========
Basic earnings (loss) per share $ 0.04 (0.39)
========== ===========
Diluted earnings (loss) per share $ 0.03 $ (0.39)
========== ===========
Basic weighted-average common and equivalent shares 3,614,998 5,398,604
========== ===========
Diluted weighted-average common and equivalent shares 3,663,231 5,398,604
========== ===========
================================================================================
*The accompanying notes are an integral part of these statements.
2
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Three Months Ended March
31, 2001 (unaudited), and the Year Ended December 31, 2000
====================================================================================================================================
Additional Retained
Common Paid in Earnings Treasury
Stock Capital (Deficit) Stock
----- ------- --------- -----
Balance, December 31, 1999 104,158 194,097,193 (15,463,462) (61,212,809)
--------- ------------- ------------- -------------
Repurchase of common stock -- -- -- (25,420,635)
Net income -- -- 8,364,480 --
Other comprehensive income
Change in unrealized loss on available-for-sale securities -- -- -- --
Comprehensive income
Dividends -- -- (12,879,650) --
--------- ------------- ------------- -------------
Balance, December 31, 2000 104,158 194,097,193 (19,978,632) (86,633,444)
--------- ------------- ------------- -------------
Stock option grants -- 142,500 -- --
Repurchase of common stock -- -- -- (8,334,135)
Net Income -- -- 127,805 --
Other comprehensive income
Change in unrealized loss on available-for-sale securities -- -- -- --
Change in unrealized loss on cash flow hedge -- -- -- --
Comprehensive income -- -- -- --
Dividends -- -- (2,129,971) --
--------- ------------- ------------- -------------
Balance, March 31, 2001 $ 104,158 $ 194,239,693 $ (21,980,798) $ (94,967,579)
========= ============= ============= =============
Accumulated
Other
Comprehensive
Income Comprehensive
(Loss) Total Income (Loss)
------ ----- -------------
Balance, December 31, 1999 (12,982,359) 104,542,721
------------ ------------
Repurchase of common stock -- (25,420,635)
Net income -- 8,364,480 $ 8,364,480
Other comprehensive income
Change in unrealized loss on available-for-sale securities 12,233,668 12,233,668 12,233,668
------------
Comprehensive income $ 20,598,148
============
Dividends -- (12,879,650)
------------ ------------
Balance, December 31, 2000 (748,691) 86,840,584
------------ ------------
Stock option grants -- 142,500
Repurchase of common stock -- (8,334,135)
Net Income -- 127,805 $ 127,805
Other comprehensive income
Change in unrealized loss on available-for-sale securities 7,714,316 7,714,316 7,714,316
Change in unrealized loss on cash flow hedge (55,694) (55,694) (55,694)
------------
Comprehensive income -- -- $ 7,786,427
============
Dividends -- (2,129,971)
------------ ------------
Balance, March 31, 2001 $ 6,909,931 $ 84,305,405
============ ============
====================================================================================================================================
* The accompanying notes are an integral part of these statements.
3
FBR Asset Investment Corporation
Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000
(unaudited)*
===============================================================================
For the Three Months Ended March 31,
--------------------------------------
2001 2000
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 127,805 $ (2,128,192)
Adjustments to reconcile net income to net cash provided by operating
activities
Realized and recognized losses on mortgage-backed and available-for-
sale equity securities 564,855 4,861,104
Compensation expense related to stock option grants 142,500 --
Amortization -- 4,717
Premium amortization on mortgage-backed securities 226,814 94,977
Changes in operating assets and liabilities:
Due from custodian -- 806,093
Dividends receivable 639,549 691,147
Interest receivable 142,908 404,162
Prepaid expenses 86,395 27,381
Management fees payable 117,100 357,229
Accounts payable and accrued expenses (116,086) 2,764
Interest payable 293,032 487,959
Other (56,105) (167,547)
------------ ------------
Net cash provided by operating activities 2,168,767 5,441,794
------------ ------------
Cash flows from investing activities:
Purchase of mortgage-backed securities -- (15,903,118)
Investments in equity securities (7,144,000) (1,801,410)
Investments in notes receivable (12,000,000) 2,456,930
Repayment of notes receivable 4,000,000 --
Proceeds from sale of mortgage backed securities -- 59,546,303
Proceeds from sale of available-for-sale equity securities 266,956 12,384,885
Receipt of principal payments on mortgage-backed securities 6,859,866 6,383,223
------------ ------------
Net cash (used in) provided by investing activities (8,017,178) 63,066,813
------------ ------------
Cash flows from financing activities:
Repurchase of common stock (8,334,135) (11,949,318)
Repayments of repurchase agreements (7,939,000) (55,643,000)
Dividends paid (3,778,366) (4,258,900)
------------ ------------
Net cash used in financing activities (20,051,501) (71,851,218)
------------ ------------
Net decrease in cash and cash equivalents (25,899,912) (3,342,611)
Cash and cash equivalents, beginning of the period 36,810,566 13,417,467
------------ ------------
Cash and cash equivalents, end of the period $ 10,910,654 $ 10,074,856
============ ============
Supplemental disclosure:
Securities purchased but not settled and noncash investing activities $ -- $ 27,391,493
Cash payments for interest $ 1,610,912 $ 2,484,850
================================================================================
*The accompanying notes are an integral part of these statements.
4
FBR ASSET INVESTMENT CORPORATION
Notes to Financial Statements (unaudited)
Note 1 Basis of Presentation
The financial statements of FBR Asset Investment Corp. ("FBR Asset" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q. Therefore, they do not include all information required by generally
accepted accounting principles for complete financial statements. The interim
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results for
the entire year. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 2000 and included on Form 10-K filed by the Company with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 Investments in Mortgage-Backed Securities
For the three months ended March 31, 2001, the weighted average coupon rate on
mortgage-backed securities was 6.92%.
The following table summarizes the Company's mortgage-backed securities as of
March 31, 2001, and December 31, 2000:
Total Mortgage
March 31, 2001 Freddie Mac Fannie Mae Ginnie Mae Assets
- -------------- ----------- ---------- ---------- ------
Mortgage-backed securities,
available-for-sale, principal $83,236,832 $54,706,855 $ 8,914,473 $146,858,160
Unamortized premium (discount) 351,982 589,334 548,612 1,489,928
----------- ----------- ----------- ------------
Amortized cost 83,588,814 55,296,189 9,463,085 148,348,088
Gross unrealized gains 503,852 665,942 __ 1,169,794
Gross unrealized losses(1) (93,577) (192,520) (309,014) (595,111)
----------- ----------- ----------- ------------
Estimated fair value $83,999,089 $55,769,611 $ 9,154,071 $148,922,771
=========== =========== =========== ============
Total Mortgage
December 31, 2000 Freddie Mac Fannie Mae Ginnie Mae Assets
- ----------------- ----------- ---------- ---------- ------
Mortgage-backed securities,
available-for-sale, principal $85,927,247 $58,134,867 $ 9,660,054 $153,722,168
Unamortized premium (discount) 413,946 669,906 573,054 1,656,906
----------- ----------- ----------- ------------
Amortized cost 86,341,193 58,804,773 10,233,108 155,379,074
Gross unrealized gains 138,622 424,165 __ 562,787
Gross unrealized losses (380,578) (411,713) (301,365) (1,093,656)
----------- ----------- ----------- ------------
Estimated fair value $86,099,237 $58,817,225 $ 9,931,743 $154,848,205
=========== =========== =========== ============
(1) Includes current value of Interest Rate Swap of $(55,694).
5
Note 3 Repurchase Agreements
At March 31, 2001, the Company had $126.0 million outstanding under repurchase
agreements with a weighted average borrowing rate of 5.31% as of the end of the
period and a remaining weighted-average term to maturity of 9 days. At March 31,
2001, mortgage-backed securities pledged against repurchase agreements had an
estimated fair value of $132.4 million. At March 31, 2001, the repurchase
agreements had remaining maturities of between 2 and 31 days. For the three
months ended March 31, 2001, the weighted average borrowing rate was 5.90% and
the weighted average repurchase agreement balance was $130.9 million.
Note 4 Interest Rate Swaps
The Company enters into interest rate swap agreements to offset the potential
adverse effects of rising interest rates under certain short-term repurchase
agreements. The interest rate swap agreements are structured such that the
Company receives payments based on a variable interest rate and makes payments
based on a fixed interest rate. The variable interest rate on which payments are
received is calculated based on the three-month LIBOR. The Company's repurchase
agreements, generally have maturities of 30 to 90 days and carry interest rates
that correspond to LIBOR rates for those same periods. The swap agreements
effectively fix FBR Asset's borrowing cost and are not held for speculative or
trading purposes. At March 31, 2001, the Company was party to a $50 million
notional amount interest rate swap which matures on June 1, 2001.
The Company adopted FAS 133 on January 1, 2001. Under FAS 133, changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, depending on the type of hedge transaction.
For fair value hedge transactions, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged item due to the risk
being hedged are recorded through the income statement. For cash-flow hedge
transactions, effective changes in the fair value of the derivative instrument
are reported in other comprehensive income while ineffective changes are
recorded through the income statement. The gains and losses on cash flow hedge
transactions that are reported in other comprehensive income are reclassified to
earnings in the periods in which earnings are effected by the hedged cash flows.
If a cash flow hedging relationship is terminated the related gain or loss in
other comprehensive income is amortized over the remaining life of the prior
hedging relationship.
The Company uses interest rate swaps to hedge the variablity in interest
payments associated with the variable rate repurchase agreements. Prior to SFAS
133, the Company did not record the value of these swaps on the balance sheet.
The Company has determined that the interest rate swap is an effective hedge
under FAS 133 and as a result the interest rate swap will be carried at fair
value as a cash flow hedge. In accordance with the transition provisions, the
Company recorded a cumulative-effect-type gain of $137,949 through other
comprehensive income to recognize at fair value the interest rate swap
designated as a cash flow hedge. As of March 31, 2001, the Company recorded an
additional $193,643 loss in other comprehensive income related to the change in
the fair value of the swap from January 2, 2001 to March 31, 2001. This resulted
in the swap being carried as a liability of $55,694 as of March 31, 2001. The
interest rate swap matures on June 1, 2001 at which time the $55,694 other
comprehensive loss will be reversed from equity into earnings.
Note 5 Notes Receivable
On March 30, 2001, the Company loaned $12 million to Prime Aurora, L.L.C.
("Prime Aurora"), a wholly-owned subsidiary of Prime Group Realty, L.P.
("PGRLP"). The loan bears interest at 16% per annum. The Company was paid a
commitment fee of $120,000 at closing. The loan matures on June 29, 2001,
subject to a one-time right of the borrower to extend the loan through September
30, 2001, upon payment of an extension fee of $120,000. Prime Aurora granted to
the Company a first lien mortgage on approximately 97 acres of partially
improved land owned by Prime Aurora and located in Aurora, Illinois. Although no
assurances can be provided that the value of the property encumbered by this
mortgage will be sufficient to secure the loan, PGRLP has unconditionally
guaranteed all obligations of Prime Aurora in connection with the loan.
Note 6 Comprehensive Income
Comprehensive income includes net income as currently reported by the Company on
the statement of income adjusted for other comprehensive income. Other
comprehensive income for the Company is changes in unrealized gains and losses
related to the Company's mortgage-backed securities ("MBS"), equity securities
accounted for as available for sale with changes in fair value recorded through
shareholders equity, and changes in unrealized gains and losses related to the
Company's cash flow hedge.
6
Note 7 Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code.
To qualify for tax treatment as a REIT, the Company must meet certain income and
asset tests and distribution requirements. The Company generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 90 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these requirements
could have a material adverse impact on the Company's results or financial
condition. Furthermore, because the Company's investments include stock in other
REITs, failure of those REITs to maintain their REIT status could jeopardize the
Company's qualification as a REIT. No provision has been made for income taxes
in the accompanying financial statements, as the Company believes it has met the
requirements, for all periods presented.
Note 8 Shareholders' Equity
Between January 1, and March 31, 2001, the Company repurchased 411,900 shares
of it's common stock at an average price of $20.23 per share. On March 16, 2001,
the Company declared a cash dividend of $0.60 per share payable April 16, 2001,
to shareholders of record as of March 30, 2001.
As of March 31, 2001 and December 31, 2000, 1,011,900 and 996,900 options to
purchase common stock were outstanding. These options have terms of eight to ten
years, 996,900 of theses options have an exercise price of $20 per share while
the remaining 15,000 options have a exercise price of $15 per share. As a
result, 48,233 shares were added to the number of shares considered outstanding
for the period to calculate diluted earnings per share using the treasury
method.
Note 9 Equity Investments
At March 31, 2001, the Company's equity investments had an aggregate cost basis
of $34.6 million, a fair value of $40.9 million and unrealized gains of $6.3
million.
Amount of Market Value at Market Value at
Equity Investments Investment(1) March 31, 2001 December 31, 2000
------------- --------------- -----------------
Capital Automotive REIT................................ $23,298,100 $26,721,840 $23,068,463
Annaly Mortgage Management, Inc........................ 7,144,000 9,008,000 --
Prime Retail, Inc., pfd................................ 493,920 493,920 543,939
Resource Asset Investment Trust........................ 3,704,181 4,751,689 4,245,164
Encompass Services Corporation......................... 252,624
----------- ----------- -----------
Total............................................. $34,640,201 $40,975,449 $28,110,190
=========== =========== ===========
(1) As of March 31, 2001.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, including,
without limitation, statements containing the words "believes," "plans,"
"anticipates," "expects" and words of similar meaning. Such forward-looking
statements related to future events and the future financial performance of the
Company involve known and unknown risk, uncertainties and other factors which
may cause the actual results, or performance and achievements of the Company, to
be materially different from the results or achievements expressed or implied by
such forward-looking statements. The Company is not obligated to update any such
factors or to reflect the impact of actual future events or developments on such
forward-looking statements.
Overview
The Company targets investments in real estate assets and real estate-related
companies. The Company has invested, and intends to continue investing in,
whole-pool mortgage-backed securities that are guaranteed by Fannie Mae, Freddie
Mac or Ginnie Mae, mortgage loans, mortgage-backed securities, real property,
and joint ventures formed to own real property. The Company invests in some of
these assets indirectly through its investments in and loans made to REITs and
other companies.
In addition, subject to maintaining its REIT qualification, the Company invests
from time to time in non-real estate related assets, including but not limited
to purchasing equity securities of and making mezzanine and other loans to
companies that are not involved primarily in the real estate business or in a
real estate-related business.
Results of Operations
Net Income
The Company had net income for the three months ended March 31, 2001, of
$127,805, or $0.04 per basic share, compared to a net loss of $2.1 million or
$0.39 per basic share for the corresponding period in 2000. The increase is
primarily due to a reduction in recognized losses on available-for-sale equity
securities.
For the three months ended March 31, 2001, the weighted average annual yield on
the Company's mortgage-backed securities was 6.38%. As of March 31, 2001, the
Company had investments in 37 mortgage-backed securities. For the three months
ended March 31, 2000, the weighted average annual yield on the Company's
mortgage-backed securities was 6.52%. As of March 31, 2000, the Company had
investments in 40 mortgage-backed securities.
The Company's interest income and dividend income decreased to $3.2 million for
the three months ended March 31, 2001, from $6.3 million for the three months
ended March 31, 2000. The decrease is primarily related to a reduction in
interest income received from the Company's notes receivable due to repayments
and a reduction in the Company's investment in mortgage-backed securities during
2000 from it's level during the first quarter of 2000.
For the three months ended March 31, 2001, the weighted average annual yield on
the Company's equity securities and promissory notes was 4.55%, compared to
11.27% for the three months ended March 31, 2000, based on interest and dividend
income accrued on, and the weighted average cost basis of, equity securities and
promissory notes. The average annual yield on all investments decreased to 6.09%
from 7.75%. The decrease reflects the decreased investment in mortgage-backed
securities and promissory notes during the first quarter of 2001 and the timing
of dividend income as two of FBR Asset's largest equity holdings declared their
first quarter 2001 dividends in the second quarter.
The Company incurred interest expense of $1.9 million for the three months ended
March 31, 2001. This represents 76.6% of the total expenses for the period. The
Company incurred interest expense of $3.0 million for the three months ended
March 31, 2000. This represents 82.8% of the total expenses for that period. The
$1.1 million decrease in interest expense reflects the 37.1% decrease in
weighted average borrowings under repurchase agreements to $130.9 million from
$208.0 million.
Management fees for the three months ended March 31, 2001, were $332,975
compared to $357,230 for the three months ended March 31, 2000. The Company
recorded $128,077 in incentive compensation earned by it's portfolio manager
based on the performance of the Company over the preceding 12-month period.
8
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $249,942 for the three months
ended March 31, 2001, and $260,377 for the three months ended March 30, 2000.
Interest and Dividend Income
The following tables set forth information regarding the total amount of income
from interest and dividend earning assets and the resultant average yields for
the three months ended March 31, 2001 and 2000. Information is based on daily
average balances during the period.
Three Months Ended March 31, 2001
---------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
------ ------ -----
Mortgage-backed securities available for sale $2,389,093 $151,852,327 6.38%
Investment in equity securities and
promissory notes/(1)/ 412,972 36,775,458 4.55%
Cash and cash equivalents 377,455 22,965,292 6.67%
---------- ------------ -----
Total/(3)/ $3,179,520 $211,593,077 6.09%
========== ============ =====
Three Months Ended March 31, 2000
---------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
------ ------ -----
Mortgage-backed securities available for sale $3,827,688 $235,086,277 6.52%
Investment in equity securities
and promissory notes/(2)/ 2,360,996 84,055,855 11.27%
Cash and cash equivalents 134,644 8,271,368 6.53%
---------- ------------ -----
Total/(3)/ $6,323,328 $327,413,500 7.75%
========== ============ =====
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Group Realty, L.P. and Prime Capital Funding I, LLC. Such
amounts are included as interest income in the Company's statements of
income included in its financial statements.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC and Prime Retail, Inc. Such amounts are
included as interest income in the Company's statements of income included
in its financial statements.
(3) The Company accrues dividend income based on declared dividends for the
periods presented.
Changes in Financial Condition
Mortgage-Backed Securities Available for Sale
The Company invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk of
credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac, among other assets.
The Company held mortgage-backed securities of $148.9 million as of March 31,
2001. The Company held mortgage-backed securities of $154.8 million on December
31, 2000.
9
Premium and discount balances associated with the purchase of mortgage-backed
securities are amortized as a decrease or increase in interest income over the
life of the security. At March 31, 2001, the amount of unamortized premium, net
of discounts recorded in the Company's statement of financial condition was $1.5
million. At December 31, 2000, the amount of unamortized premium, net of
discounts recorded in the Company's statement of financial condition was $1.7
million.
The Company received mortgage principal payments equal to $6.9 million for the
three months ended March 31, 2001. The Company received mortgage principal
payments equal to $23.7 million for the year ended December 31, 2000.
At March 31, 2001, $6.3 million of net unrealized gains on equity securities and
$0.6 million of net unrealized gains on mortgage-backed securities were included
in the Company's statement of financial condition as accumulated other
comprehensive income. At December 31, 2000, $0.2 million of net unrealized
losses on equity securities and $0.5 million of net unrealized losses on
mortgage-backed securities were included in the Company's statement of financial
condition as accumulated other comprehensive loss.
Repurchase Agreements
To date, the Company's debt has consisted mainly of borrowings collateralized by
a pledge of most of the Company's mortgage-backed securities. The Company has
obtained, and believes it will be able to continue to obtain, short-term
financing in amounts and at interest rates consistent with the Company's
financing objectives.
The Company had $126.0 million outstanding under repurchase agreements with
several financial institutions on March 31, 2001. The Company had $133.9 million
outstanding under repurchase agreements on December 31, 2000. At March 31, 2001,
the ratio of the amounts due under repurchase agreement to shareholder's equity
was 1.49 to 1.
At March 31, 2001, the term to maturity of the Company's borrowings had been
limited to 31 days with a weighted average remaining maturity of 9 days and a
weighted average cost of funds on outstanding borrowings of 5.31%.
Notes Receivable
On March 30, 2001, the Company loaned $12 million to Prime Aurora, L.L.C.
("Prime Aurora"), a wholly-owned subsidiary of Prime Group Realty, L.P.
("PGRLP"). The loan bears interest at 16% per annum. The Company was paid a
commitment fee of $120,000 at closing. The loan matures on June 29, 2001,
subject to a one-time right of the borrower to extend the loan through September
30, 2001, upon payment of an extension fee of $120,000. Prime Aurora granted to
the Company a first lien mortgage on approximately 97 acres of partially
improved land owned by Prime Aurora and located in Aurora, Illinois. Although no
assurances can be provided that the value of the property encumbered by this
mortgage will be sufficient to secure the loan, PGRLP has unconditionally
guaranteed all obligations of Prime Aurora in connection with the loan.
Capital Resources and Liquidity
Liquidity is a measurement of the Company's ability to meet potential cash
requirements including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities, and for other general
business purposes. The primary sources of funds for liquidity consist of
repurchase agreements and maturities, distributions or principal payments on
mortgage- backed and equity securities, and proceeds from sales of those
securities. To date, proceeds from the issuance of common stock and repurchase
agreements have provided the Company with sufficient funding for its investment
needs. Potential future sources of liquidity for the Company include existing
cash balances, borrowing capacity through margin accounts, and future issuances
of common, preferred stock or debt. The Company believes that its existing cash
balances, borrowing capacity through margin accounts and borrowing capacity
under collateralized repurchase agreements will be sufficient to meet its
investment objectives and fund operating expenses for at least the next twelve
months. The Company may, however, seek debt or equity financings, in public or
private transactions, to provide capital for corporate purposes and/or strategic
business opportunities. There can be no assurance that the Company will be able
to generate sufficient funds from future operations, or raise sufficient debt or
equity on acceptable terms, to take advantage of investment opportunities that
become available. Should the Company's needs ever exceed these sources of
liquidity, management believes the Company's mortgage-backed and equity
securities could be sold, in most circumstances, to provide cash.
For the three months ended March 31, 2001, the Company's operating activities
resulted in net cash flows of $2.2 million. The primary source of operating cash
flow was interest on mortgage-backed securities, interest on notes receivable
and dividends
10
from REIT investments. For the three months ended March 31, 2000, the Company's
operating activities provided net cash flows of $5.4 million.
For the three months ended March 31, 2001, the Company's investing activities
resulted in net cash used of $8.0 million compared to net cash provided by
investing activities for the three months ended March 30, 2000, of $63.1
million. The change is primarily attributable to decreased sales of mortgage-
backed and available-for-sale equity securities during the first quarter of 2001
compared to the first quarter of 2000.
For the three months ended March 31, 2001, net cash used in the Company's
financing activities was $20.0 million compared to net cash used for the three
months ended March 31, 2000, of $71.9 million. The decrease in cash used in
financing activities is primarily attributable to a decrease in stock
repurchases and a lesser reduction of repurchase agreements in the first quarter
of 2001.
Shareholders' Equity
As of March 31, 2001, the value of the equity securities in the Company's
portfolio had increased from the adjusted cost basis of $34.6 million to $40.9
million. As of December 31, 2000, the value of the equity securities in the
Company's portfolio had declined from the adjusted cost basis of $28.3 million
to $28.1 million. Increases and declines are generally recorded as accumulated
other comprehensive income in the statement of financial condition, except to
the extent they are deemed to be other than temporary.
If the Company determines that declines are other than temporary, it records a
charge against income for the difference between an investment's cost basis and
its market value. For the three months ended March 31, 2001, the Company
recorded a charge to reflect the decline in value of its investment in Prime
Retail, Inc.'s preferred stock of $0.5 million. In the first quarter of 2000,
the Company recognized and charged to income losses of $5.6 million on its
investments in Encompass Services Corporation, Resource Asset Investment Trust,
and Prime Retail, Inc.
In addition, with the adoption of FAS 133 on January 1, 2001, the Company
accounts for changes in the fair value of its interest rate swap that qualifies
as a cash flow hedge through other comprehensive income. This resulted in a
$55,694 decrease in other comprehensive income during the first quarter of 2001.
See Note 4 of "Notes to Financial Statements-Interest Rate Swaps" for more
information.
11
FBR ASSET INVESTMENT CORPORATION
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of March 31, 2001, and
December 31, 2000.
As of March 31, 2001 As of December 31, 2000
-------------------- -----------------------
Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Percent Of Market Increase of Market Increase
Owned Ownership/(3 Investment Value (Decrease) Investment Value (Decrease)
----- ------------ ---------- ----- ---------- ---------- ----- ----------
Mortgage-Backed Securities N/A N/A $148,348,088 $148,922,771 0.39% $155,379,074 $154,848,205 (0.34%)
------------ ------------ ----- ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Investments/(1)(2)/
Capital Automotive REIT
(CARS) 1,670,115 7.88% 23,298,100 26,721,840 14.70% 23,298,100 23,068,463 (0.99%)
Annaly Mortgage Management, Inc.
(NLY) 800,000 5.51% 7,144,000 9,008,000 26.09% -- -- --
Prime Retail, Inc., pfd
(PRT pfd) 78,400 3.41% 493,920 493,920 0.00% 1,038,800 543,939 (47.64%)
Resource Asset Investment
Trust (RAS) 344,575 5.46% 3,704,181 4,751,689 28.28% 3,704,181 4,245,164 14.60%
Encompass Services
Corporation (ESR)/(4)/ 49,900 0.08% -- -- 286,931 252,624 (11.96%)
------------ ------------ ------ ------------ ------------ --------
Total Equity Investments $ 34,640,201 $ 40,975,449 18.29% $ 28,328,012 $ 28,110,190 (0.77%)
------------ ------------ ------ ------------ ------------ --------
Promissory Notes/(2)/
Prime Capital Funding I, LLC N/A N/A -- -- N/A 4,000,000 4,000,000 N/A
Prime Group Realty, L.P. N/A N/A 12,000,000 12,000,000 N/A -- -- N/A
------------ ------------ ------------ ------------ --------
Total Promissory Notes $ 12,000,000 $ 12,000,000 N/A $ 4,000,000 $ 4,000,000 N/A
------------ ------------ ------------ ------------
Cash and Cash Equivalents N/A N/A $ 10,910,654 $ 10,910,654 N/A $ 36,810,566 $ 36,810,566 N/A
------------ ------------ ------------ ------------
Total Investments & Cash
and Cash Equivalents $205,898,943 $212,808,874 3.36% $224,517,652 $223,768,961 (0.33%)
============ ============ ============ ============ ========
(1) The symbols in parentheses next to the company names are the symbols of
those companies on Nasdaq or a national securities exchange. Each of these
companies is a reporting company under the Securities Exchange Act of 1934.
Information is available about these companies on the SEC's website,
www.sec.gov.
(2) FBR has underwritten or privately placed the securities of these companies
or their affiliates.
(3) As of December 31, 2000.
(4) Formerly Building One Services Corporation (BOSS)
12
FBR ASSET INVESTMENT CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that can result from a change
in the prices of equity securities in the equity market, a change in the value
of financial instruments as a result of changes in interest rates, a change in
the volatility of interest rates or, a change in the credit rating of an issuer.
The Company is exposed to the following market risks as a result of its
investments in mortgage-backed securities and equity investments. None of these
investments is held for trading purposes.
Interest Rate Risk
The Company is subject to interest rate risk as a result of its investments in
mortgage-backed securities and its financing with repurchase agreements, all of
which are interest rate sensitive financial instruments. The Company is exposed
to interest rate risk that fluctuates based on changes in the level or
volatility of interest rates and mortgage prepayments and in the shape and slope
of the yield curve. The Company attempts to hedge a portion of its exposure to
interest rate risk primarily through the use of interest rate swaps.
The Company's primary risk is related to changes in both short and long term
interest rates, which affect the company in several ways. As interest rates
increase, the market value of the mortgage-backed securities may be expected to
decline, prepayment rates may be expected to go down and durations may be
expected to extend. An increase in interest rates is beneficial to the market
value of the Company's swap position as the cash flows from the floating rate
portion increase under this scenario. The reverse is true for mortgage-backed
securities and the swap if interest rates decline.
The Company records it's interest rate swap agreements at fair value (See Note 4
of "Notes to Financial Statements-Interest Rate Swaps"). The differential
between amounts paid and received under the swap agreements is recorded as an
adjustment to the interest expense incurred under the repurchase agreements. In
the event of early termination of a swap agreement, a gain or loss is recorded
and the company receives or makes a payment based on the fair value of the swap
agreement.
The table that follows shows the expected change in market value for the
Company's current mortgage-backed securities and interest rate swaps under
several interest rate "shocks." Interest rates are defined by the U.S. Treasury
yield curve. The changes in rates are assumed to occur instantaneously. It is
further assumed that the changes in rates occur uniformly across the yield curve
and that the level of LIBOR changes by the same amount as the yield curve.
Actual changes in market conditions are likely to be different from these
assumptions.
Changes in value are measured as percentage changes from their respective values
presented in the column labeled "Value at 3/31/01." Actual results could differ
significantly from these estimates.
The change in value of the mortgage-backed securities also incorporates
assumptions regarding prepayments, which are based on a proprietary model. This
model forecasts prepayment speeds based, in part, on each security's issuing
agency (Fannie Mae, Ginnie Mae or Freddie Mac), coupon, age, prior exposure to
refinancing opportunities, the interest rate distribution of the underlying
loans, and an overall analysis of historical prepayment patterns under a variety
of past interest rate conditions.
13
Value at
3/31/01
with 100
Value at 3/31/01 basis point
with 100 basis decrease in
Value at point increase Percent interest Percent
3/31/01/(1)/ in interest rates Change rates Change
------------ ----------------- ------ ----- ------
Assets
Mortgage-backed securities $148,922,771 $147,036,894 (1.27%) $153,071,913 2.79%
Other 65,052,357 65,052,356 65,052,356
------------ ------------ ------------
Total Assets $213,975,128 $212,089,250 (0.88%) $218,124,269 1.94%
============ ============ ============
Liabilities
Interest rate swap $ 55,694 $ 54,345/(2)/ $57,047/(2)/
Other 129,614,029 129,614,029 129,614,029
------------ ------------ ------------
Total Liabilities $129,669,723 $129,668,374 (0.00%) $129,671,076 0.00%
============ ============ ============
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,239,693 194,239,693 194,239,693
Accumulated other
Comprehensive income (loss) $ 6,909,931 $ 5,025,402 (27.27%) 11,057,719 60.03%
Retained deficit (21,980,798) (21,980,798) (21,980,798)
Treasury stock $(94,967,579) $(94,967,579) (94,967,579)
------------ ------------ ------------
Total Shareholders' Equity $ 84,305,405/(2)/ $ 82,420,876 (2.24%) $ 88,453,193 4.92%
------------ ------------ ------------
Total Liabilities and
Shareholders' Equity $213,975,128 $212,089,250 (0.88%) $218,124,269 1.94%
============ ============ ============
(1) Includes Accrued Interest.
(2) The carrying value of the interest rate swap in the company's financial
statements is $55,694. See Note 4 to Notes to Financial Statements. The
fair value of the interest rate swap is based on quoted market prices as of
March 31, 2001. As of March 31, 2001, interest payments received under the
swap agreement were based on an interest rate of 5.09% while interest
payments made were based on an interest rate of 5.96%.
As shown above, the portfolio generally will benefit more from a decline in
interest rates than it will be adversely affected by a similar-scale increase.
This effectively may limit investors' upside potential in a market rally.
The value of the Company's investments in other companies is also likely to be
affected by significant changes in interest rates. First, many of the companies
are exposed to risks similar to those identified above as being applicable to
the Company's direct investments. Second, the REITs in which the Company has
invested tend to trade on a yield basis. As interest rates increase, the yield
required by investors in REITs, thrifts and other financial institutions
increases with the result that market values decline. Finally, changes in
interest rates often affect market prices of equity securities generally.
Because each of the companies in which the Company invests has its own interest
rate risk management process, it is not feasible for us to quantify the
potential impact that interest rate changes would have on the stock price or the
future dividend payments by any of the companies in which the Company has
invested.
Equity Price Risk
The Company is exposed to equity price risk as a result of its investments in
equity securities of REITs and other real estate related companies. Equity price
risk changes as the volatility of equity prices changes or the values of
corresponding equity indices change.
While it is impossible to exactly project what factors may affect the prices of
equity sectors and how much the affect might be, the table below illustrates the
impact a ten percent increase and a ten percent decrease in the price of the
equities held by the Company would have on the value of the total assets and the
book value of the Company as of March 31, 2001.
14
Value at
March 31, 2001 Value at
with March 31, 2001 with
Value at 10% increase Percent 10% decrease in Percent
March 31, 2001 in price Change price Change
-------------- -------- ------ ----- ------
Assets
Equity securities $ 40,975,449 $ 45,072,994 10.00% $ 36,877,904 -10.00%
Other 172,999,679 172,999,678 172,999,678
------------ ------------ ------------
Total Assets $213,975,128 $218,072,672 1.91% $209,877,582 -1.91%
Liabilities $129,669,723 $129,669,723 $129,669,723
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,239,693 194,239,693 194,239,693
Accumulated comprehensive
Income 6,909,931 11,007,476 59.30 2,812,386 -59.30
Retained deficit (21,980,798) (21,980,799) (21,980,799)
Treasury stock (94,967,579) (94,967,579) (94,967,579)
------------ ------------ ------------
Total
Shareholders' Equity $ 84,305,405 $ 88,402,949 4.86% $ 80,207,859 -4.86%
Total Liabilities and
Shareholders'
Equity $213,975,128 $218,072,672 1.91% $209,877,582 -1.91%
============ ============ ============
Book value per share $ 24.28 $ 25.46 4.86% $ 23.10 -4.86%
============ ============ ============
Except to the extent that the Company sells its equity investments or a decrease
in market value is deemed to be other than temporary, an increase or decrease in
the market value of those assets will not directly affect the Company's
earnings, however an increase or decrease in interest rates would affect the
market value of the assets owned by the companies in which the Company invests.
Consequently, if those companies' earnings are affected by changes in the market
value of their assets, that could in turn impact their ability to pay dividends,
which could in turn affect the Company's earnings. If the Company had sold all
of its equity investments on March 31, 2001, the company would have realized a
gain of approximately $6.3 million which would have been included in earnings.
15
FBR ASSET INVESTMENT CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The registrant's stock became registered under the Securities and
Exchange Act of 1934 on September 27, 1999. The common stock is listed on the
American Stock Exchange and its symbol is "FB."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 4, 2001.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FBR ASSET INVESTMENT CORPORATION
(Registrant)
Date: May 15, 2001 By: /s/ Kurt R. Harrington
----------------------
Kurt R. Harrington
Chief Financial Officer, Treasurer and
Principal Financial and Accounting Officer
17