EXHIBIT 99.3
Third Quarter 2002
Friedman, Billings, Ramsey Group, Inc.
Earnings Conference Call Script
Wednesday, October 30, 2002
[Speaker: Kurt Harrington]
Good Morning. This is Kurt Harrington, Chief Financial Officer of Friedman,
Billings, Ramsey Group, Inc.
Before we begin the call, I would like to remind everyone that statements
concerning future performance, developments, events, market forecasts, revenues,
expenses, earnings, run rates and any other guidance on present or future
periods constitute forward-looking statements. These forward-looking statements
are subject to a number of factors, risks and uncertainties that might cause
actual results to differ materially from stated expectations or current
circumstances. These factors include, but are not limited to, the effect of
demand for public offerings, activity in the secondary securities markets,
interest rates, the high degree of risk associated with technology and other
venture capital investments, available technologies, competition for business
and personnel, and general economic, political, and market conditions.
Additional information concerning factors that could cause results to differ
materially is contained in FBR's Annual Report on Form 10-K and quarterly
reports on Form 10-Q.
I would now like to turn over the call to our Chairman and Co-Chief
Executive Officer, Emanuel Friedman. Also joining us this morning are Eric
Billings, Vice Chairman and Co-CEO, and Bob Smith, our Chief Operating Officer.
[New speaker: Manny Friedman]
Thank you and good morning. This morning we announced strong results for
the third quarter of 2002, which I am pleased to report continues the trend of
revenue and earnings growth while reaffirming, in unsettled times, the ongoing
success of our platform build-out, the positive impact from continuing expense
control as well as efficiency and effectiveness in our execution. Third quarter
revenues are the highest since the first quarter of 1998. During the quarter we
added 24 personnel -- 4 in research, 9 in sales, 1 in trading, 4 in investment
banking and 3 in asset management. We also opened our 16th office in San
Francisco and moved our New York City operations into expanded, permanent
quarters in midtown Manhattan.
For the third quarter, we reported earnings after tax of $15.1 million, or
$0.33 per share, on revenues of $81.7 million. This constitutes a 275%
improvement in revenue year over year, and a strong accomplishment in the face
of a brutal market. In these numbers, we see the continuation of revenue growth,
diversification and expense discipline resulting in strong profitability in each
of our profit centers - investment banking, institutional brokerage and asset
management (including FBR Asset Investment Corporation).
At September 30th our book value per share was $5.06 ($5.13 assuming
repayment of stock purchase loans) - our highest book value ever and about a 25%
increase over the book value at the start of the year.
During the Quarter we recorded a 16% effective income tax rate, reflecting
our anticipated utilization of all tax NOLs during the remainder of 2002.
The company's results for the quarter also reflect almost $9.0 million of
non-cash markdowns in the company's asset management and technology sector
investments, primarily attributable to publicly traded securities due to the
volatility of the public equity markets in the quarter. As of September 30, the
company's long-term equity investments (excluding FBR Asset Investment
Corporation and trading securities) were valued at approximately $62 million
(including Hedge Funds and Technology Venture Capital Funds). So far in October
we have seen modest recovery in our fund portfolios.
In investment banking, during the third quarter, FBR raised approximately
$1.1 billion in capital. We completed 6 equity raises, lead managing 2 public
underwritings and 3 private placements, and co-managed another public
underwriting. In addition, we completed 2 M&A transactions and 3 other advisory
assignments. These transactions included a more than $400 million 144A
institutional equity placement for American Financial Realty Trust, and a more
than $500 million sole managed follow-on public offering for AmeriCredit Corp.
The major sector contributors in investment banking were clearly financial
services and real estate, but we continued to see opportunity in our other 4
industry sectors, and to actively recruit professionals across the board. While
we may not see this dollar volume in the 4th Quarter we are continuing to see
significant - and broad - investment banking activity. In fact, we expect the
number of deals in the 4th Quarter to exceed the number in the 3rd Quarter. We
priced a significant 144A placement for a financial institution last night and
expect to price an energy public offering and a biotechnology private placement
in the next few days.
In asset management, gross assets under management increased 218% since the
beginning of the year, net assets were up 43% and productive assets grew 211%.
Asset management revenue was up 117% for the quarter on a year over year basis.
As you know, a major contributor to FBR Group is FBR Asset, a separate
public company (NYSE:FB). As previously noted, FBR Asset provides us with base
management fees and incentive fees as its manager and a proportionate share of
its earnings as a minority shareholder.
In essence, Q3 2002 ranks as one of the company's best as a public concern.
The combination of revenue growth, diversification of our business, expense
discipline, increasing profitability, an expanded capital base resulting from
retained cash earnings and a relatively unleveraged balance sheet have enabled
us to strengthen and expand our platform through selective, prudent development
and hiring. The weakness that is seen in parts of our industry presents
particularly advantageous opportunities. Nevertheless, our continuing operative
strategy is one of prudence. We are in the enviable position of being able to
grow where appropriate but with caution and moderate exposure.
Now I would like to hand the call over to Eric Billings.
[New Speaker: Eric Billings]
Thanks Manny.
In the past, we have discussed where we expect our annualized breakeven
revenue levels to run in our capital markets businesses - investment banking and
institutional brokerage. Of course, revenues in each of these businesses ran
well above the breakeven levels in the third quarter and for the first nine
months of 2002. As noted last quarter, for 2002, we intend to maintain a $55
million annualized breakeven target in each of investment banking and
institutional brokerage, for a total breakeven target in our capital markets
business of about $110 million. We expect a 40% pre-tax variable contribution
from investment banking and better than 30% from institutional brokerage, beyond
their respective breakeven levels.
As noted earlier, investment banking revenues have been steadily increasing
in one of the most challenging markets for Investment Banking that any of us
have ever seen. Investment banking revenue for the first nine months of the year
was almost $120 million, already exceeding our original estimate of $110 million
for the full year. Of course this part of our business is subject to revenue
volatility, but the fact that we have achieved these levels of Investment
Banking activity in the face of very difficult capital markets, once again
illustrates the strengths of our platform in the absence of a frenzied capital
markets environment.
Institutional brokerage revenues are also increasing; up 43% in the first
nine months of 2002 compared to the comparable period in 2001. Institutional
Brokerage revenue for the first nine months of the year was about $48.5 million,
or annualized at approximately $65 million - in line with our previously
announced guidance. These results reflect the continuation of the growth trend
that we have seen over the last 2 years, despite a very difficult environment
for secondary trading.
Now let me take a moment to comment on the qualitative aspects of our
capital markets business. Our success in executing very large equity raises for
American Financial Realty Trust and AmeriCredit during the third quarter points
up four distinguishing characteristics of our platform:
1. First, American Financial is the latest in the series of
transactions in which FBR has been involved as a creator of
businesses; almost more of a merchant bank rather than investment
bank. Prior transactions have included Capital Automotive and FBR
Asset.
2. Second, AmeriCredit is an example of our ability to identify
strong businesses that have unique qualities that distinguish them
from others in their peer group but may have leveraged or
inappropriate capital structures.
3. Third, both deals exemplify the institutional distribution power
of FBR which, as we have said many times, enables us to raise the
level of capital appropriate to the characteristics of a business.
4. In spite of, or perhaps because of, a difficult capital market,
FBR is able to raise significant amounts of equity capital
demonstrating the great strength of our capital markets platform
which focuses on the intrinsic value of businesses and maximizing
that business on a risk adjusted basis.
In part as a result of these successes, and in particular the
recapitalization of AmeriCredit we are beginning to see other potential
recapitalization transactions in all of our industry sectors. This potential
activity creates the possibility for us to execute more such transactions going
forward.
In asset management, where we generate revenues from base management fees,
incentive fees on many of our managed vehicles, and return on our invested
capital, we see the same revenue growth trend over the nine month period. This
is a result of a combination of strong performance and inflows of assets under
management. We have grown asset management revenues over the last three calendar
years, with increases of 112% for the first nine months of 2002 compared to the
comparable period last year.
Our asset management revenues have been enhanced by the growth and
performance of FBR Asset Investment Corporation. We owned approximately 10% of
FBR Asset in our long-term investments as of September 30.
Lastly, I would like to point out that we have seen in the last 2 Quarters
the generation of excess cash at a more than $15 million level per Quarter. We
intend to redeploy this capital in a MBS strategy comparable to the one we
employ for FBR Asset. Currently, this strategy is providing returns, at the
margin, in excess of 20% on equity.
With that, I would like to open the call for questions.
[At end of Q&A]
If there are no further questions, that concludes our conference call for
today. Thanks everyone for joining us. We appreciate it.