EX.99.1
Second Quarter 2003
Friedman, Billings, Ramsey Group, Inc.
Earnings Conference Call Transcript
Wednesday, July 30, 2003
Moderator:
Hello, and welcome to Friedman, Billings, Ramsey's second quarter earnings
results conference call. Participants have been placed on listen only until the
question answer segment of today's conference. This conference call is being
recorded. If you have any objections, you may disconnect at this time. Ok, now
I'd like to turn the call over to Mr. Kurt Harrington, Chief Financial Officer.
Thank you sir, you may begin.
Kurt Harrington: Good Morning. This is Kurt Harrington, Chief Financial
Officer of Friedman, Billings, Ramsey Group, Inc.
Before we begin this morning's earnings 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, our cost of borrowing, interest spreads,
mortgage prepayment speeds, the risks associated with merchant banking
investments, the realization of gains and losses on principal 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
Group's Annual Report on Form 10-K and quarterly reports on Form 10-Q.
I would now like to turn over the call to FBR Group's Co-Chairmen and
Co-Chief Executive Officers, Emanuel Friedman and Eric Billings. Also joining us
this morning are Robert Smith, FBR's Chief Operating Officer, Rock Tonkel, Head
of Investment Banking and Rick Hendrix, Chief Investment Officer.
Emanuel Friedman:
Thank you and good morning. Last night we announced our June quarter
results. As many of you know, this was our first quarter following our recent
merger. After-tax earnings were $58.8 million or $.43 per share compared to
$17.8 million or $0.36 per share in the second quarter last year and compared to
$31.6 million or $0.29 per share on a pro-forma basis in the second quarter of
last year. Each of our businesses contributed positively to these results as we
realized the impact of our more diversified earnings mix.
These results reflect the major impact upon our businesses of the
merger of our two companies on March 31, 2003. The results demonstrate clearly
the merged company's business model as our balance sheet businesses more than
covered our $.34 quarterly dividend while our capital market and asset
management businesses retained $10 million of after-tax earnings, maintaining
the company's dynamic growth characteristic. We continue to be able to
selectively hire senior level personnel across all of our business segments.
Our second quarter performance was driven by the combined strength of
our $8 billion dollar balance sheet, the FBR investment banking platform, our
continued penetration of major institutional brokerage accounts, expansion of
our research offerings, the growth of assets under management, and our expense
discipline. Most importantly, we have begun to realize many of the intangible
benefits of our merger earlier and in a more substantial way than we had
anticipated. These benefits have had a direct impact on our businesses
particularly as we look forward into the coming quarters.
In the investment banking business, FBR completed four lead-managed
equity offerings totaling $1.1 billion during the quarter, including an $804
million IPO for American Financial Realty (AFR), the largest IPO of the year to
date. FBR ranked as the number two lead-managing IPO underwriter in the United
States for the first six months of 2003, with a market share in excess of 30%,
according to CommScan Equidesk (ranked by dollar volume). For the six months
ended June 30, 2003, FBR is the number one ranked lead managing underwriter in
after-market performance for all United States equity offerings, according to
CommScan Equidesk.
On the balance sheet we began the quarter with only $5.1 billion in the
MBS portfolio, and averaged $6.2 billion during the quarter. By quarter end we
had grown the portfolio to $8.1 billion. The average spread during the quarter
was 199 basis points. We continue to be pleased with the relative stability of
the value of the portfolio and our net interest spread during the recent period
of interest rate volatility.
We remain confident that 2003 earnings will allow us to declare
dividends for the full year of $1.37 or more, half of which we have already
declared for the first and second quarters.
Now I would like to hand the call over to Eric Billings who will
discuss our results in more detail and our outlook for the balance of the year.
Eric Billings:
Thanks Manny.
Before we go through the detail of our five profit centers, I would
like to share with you our perspective on how the business is developing
following our recent merger. As Manny mentioned, we finished the first half of
the year as the number 2 lead manager of IPO's, and through today we are
currently the number 1 ranked lead manager of IPO's in total dollars raised,
according to Bloomberg. As you may recall, during our first quarter conference
call we described an investment banking pipeline that totaled approximately $3.5
billion in lead managed business. In the second quarter we have completed $1.1
billion in lead managed capital raises and continue to have a backlog in excess
of our previous $3.5 billion. In fact, we currently believe our third quarter
investment banking revenues will exceed the $60.5 million generated in the
entire first half of the year. This success and our strong outlook going forward
can be attributed to several factors. Clearly, as Manny mentioned, the
intangible benefits of our merger have materialized in a way that even we did
not anticipate as our greater capital base, resources, and visibility have
translated into greater credibility and opportunities with issuers. Most
importantly, our successful track record has begun to be more broadly recognized
and understood leading to increased relationships with institutional investors
and more engagements with high quality investment banking clients.
The factors positively impacting our businesses are all based upon the
foundation we have built at FBR since our creation. That foundation has and will
continue to be built on understanding the intrinsic value of businesses and
applying it to all of our businesses. This enables us to consistently structure
and complete innovative transactions that require a clear understanding of our
client's business and industry and the ability to accurately describe the
associated investment opportunity. This ability is what differentiates our
franchise and is what has allowed us to lead our industry in helping to
capitalize and create some of the leading companies in the sectors we cover.
We believe that the combination of our unique franchise and the
resources of our combined company have coincided to elevate our business to the
point where we can realistically expect that both our investment banking and
institutional brokerage businesses will see permanent increases in market share
over the next several quarters. We believe that the second quarter results and
third quarter expectations are indicative of that trend.
Specifically, with regard to our second quarter results, our investment
banking, institutional brokerage and asset management businesses all continued
our track record of growth and expanded into new sectors and products.
Investment banking revenue for the quarter was $42.8 million. Our pipeline
continues to strengthen and extends across all of our industry sectors. Since
the beginning of the third quarter, we have already completed or are currently
marketing lead-managed equity offerings with an aggregate transaction value in
excess of $1.1 billion - more than the entire second quarter. This includes a
$202 million IPO for a security alarm monitoring company in our diversified
industries sector that was completed yesterday.
Institutional Brokerage revenue for the quarter was $19.6 million. Our
volumes continued to grow despite a difficult environment for our industry. This
revenue growth in the quarter reflected the impact of the merger and the impact
of new salespeople, traders and research analysts that we have added. We are
pleased with the continuing positive results of the program we instituted in
2001 aimed at deepening our relationships with the largest institutional
accounts.
Our asset management business also continues to grow. At June 30, 2003,
FBR had $1.7 billion in net assets under management, up 6.4% from June 30, 2002
(excluding FBR Asset) and up 16% for the quarter. Our mutual funds continued to
have excellent results during the quarter, with the five star FBR Small Cap
Financial Fund and FBR Small Cap Value Fund continuing to rank among the very
top of their respective classes and to attract new dollars during the quarter
Turning to our balance sheet businesses, I would like to first address
our MBS strategy. As you know, we seek to generate the vast majority of our
quarterly dividends from the MBS portfolio. Preservation of capital is our
guiding principal. As of June 30, our total MBS assets were $8.1 billion.
Our MBS portfolio continues to exhibit the following strengths:
1. Triple A credit backed by agency guarantees
2. low leverage
3. low premium dollar cost
4. substantially all adjustable-rate securities
We manage our funding by:
1. maintaining multiple counterparties to diversify our funding resources
2. holding high quality assets that can be financed in varying market
environments and
3. at appropriate times, hedging up to two-thirds of our interest rate
exposure by locking in funding costs for terms of one year or greater
..
The company's mortgaged-backed securities portfolio averaged $6.2
billion during the quarter. The weighted average annualized yield of the
portfolio was 3.25% during the period and the company's weighted average cost of
financing was 1.26% resulting in an average net interest spread of 1.99%.
Included in this result are non-cash purchase accounting adjustments from the
merger which reduced the company's net interest spread by 10.5 basis points. The
average one month constant prepayment rate was 35 during the quarter. The dollar
premium of the MBS portfolio was 2.4% and unrealized gains were $34.8 million at
the end of the quarter. The portfolio continued to exhibit a low duration of
1.15. New investments in the portfolio today would provide a net interest spread
of approximately 2.16% compared to our second quarter spread of 1.99%.
Subsequent to the end of the quarter, $3 billion of one-year swaps with
a cash basis funding cost of 2.15% expired resulting in roughly a 100 basis
point reduction in our cost of funds on that portion of our balance sheet. The
company has entered into new one year interest rate swaps on $2 billion of
funding with a start date of October 2003 and a funding cost of 1.31%.
The combination of full deployment of our excess capital into the MBS
strategy, full leverage of that capital which we have now achieved, and the
potential for falling prepayment speeds, leads us to be very optimistic about
the outlook for an increasing contribution to earnings and dividends from the
MBS strategy.
FBR's merchant banking portfolio and other long term investments
totaled $236.2 million, or approximately 20.8% of the company's equity, at the
end of the quarter. Of this total, $164.4 million was held in the merchant
banking portfolio, $53.1 million was held in alternative asset funds and $18.7
million was held in broker-dealer investments. FBR generated realized gains and
dividends of $12.1 million in its merchant banking business during the quarter.
Additionally, the company had unrealized gains in the merchant banking portfolio
of $56.2 million at June 30.
As we previously stated, we do not leverage the investments in the
merchant banking portfolio. At the end of the quarter the company's leverage was
7.5:1 debt to equity.
Our internal discipline and strategy is to measure every merchant
banking investment continuously against the returns we achieve in the mortgage
backed securities portfolio. Thus, we expect the long term performance of this
portfolio to exceed returns in the MBS strategy, although realized results will
vary from quarter to quarter. This is illustrated in the year-to-date
performance this year, in which we realized no gains in the first quarter, but
realized $10.5 million in the second quarter.
Lastly, I would like to mention the enormous step forward that we took
in our marketing and brand building during the second quarter as we initiated a
national advertising campaign, and became a PGA Tour title sponsor. We believe
that the impact of these steps in building name recognition and brand awareness
nationally, and in garnering goodwill with our clients and prospects, represents
a return on investment well in line with our expectations. We are delighted that
charities in the Washington DC area will receive in excess of $832,000 from the
2003 FBR Capital Open.
I would now like to open the call for any questions.
Moderator:
Thank you. At this time, if you'd like to ask a question, please press, "star 1"
on a touchtone phone. Once again, if you'd like to ask a question, please press,
"star 1" on a touchtone phone. Our first question comes from Mike Flanagan. You
may state your company name and you may ask your question.
Mike Flanagan, Securities Industry Analytics:
Securities Industry Analytics. Good morning, very nice quarter, I have two
questions to ask. Manny you had alluded to the realizing of the intangible
benefits subsequent to the merger and Eric; you went into some good detail on
those. Let me ask you, this appears to be a transforming event, and have the
results subsequent to the merger in fact exceeded your expectations going into
the merger?
Emanuel Friedman:
Yes, we were very surprised by the fact that we're getting recognition from many
of our clients. People are understanding how large the company is, the stability
of the company. We're winning a lot more mandates, our clients are staying with
us over and over again. So we're extremely, pleasantly surprised by the enormous
impact it's having on our business.
Mike Flanagan:
And a quick follow up to that, you mentioned the, Eric you mentioned the
merchant banking portfolio had unrealized gains of $56 million at the end of the
quarter. The MBS portfolio had unrealized gains of $35 million. Could you give
us a sense of where those evaluations stand today?
Eric Billings:
The merchant banking portfolios today, we didn't we disclose that during the
quarter?
Rick Hendrix:
Yeah, what we don't do is disclose the individual investments. The unrealized
gains of the merchant bank portfolio today are roughly the same as they were at
June 30th, about $56 million, and on the MBS side, given the increase in
interest rates, today we have essentially a book value portfolio or no gains or
losses in the portfolio.
Mike Flanagan:
Thank you.
Rick Hendrix:
Thank you, Mike.
Moderator:
Thank you. Lauren Smith, your line is open, please state your company name and
you may ask your question.
Rich Herr, KBW:
Hi guys, actually it's Rich Herr from KBW. Nice quarter, just a couple of quick
questions. With the building in the investment banking pipeline, do you foresee
any kind of increase in your guidance on the dividend policy for this year or
maybe even next year?
Eric:
I think the answer to that is that people that owned the FBR asset stock will
remember that our real policy is to have a core dividend rate that we feel very
confident that we can continue in different market environments and then to the
degree that that portion of our business earns a greater return than that to
probably pay that out in the form of a special dividend at year end. And that
would probably be our continued policy going forward.
Rich Herr:
Ok great and just a couple other questions. I was wondering if I could get some
more color on the realized gains, the $17.8 million you took during the quarter,
and also the increase in the accumulated comprehensive income and the equity
account.
Emanuel Friedman:
The gains in our quarter, $12 million of that was from the merchant banking
portfolio. So that was part of the gain. And the balance was in the mortgage
back business. The unrealized gains at the end of the quarter were exactly what
we just described in the merchant banking business, about $56 million, and about
$34 million in the MBS portfolio. And remember that we marked the entire balance
sheet to market at the time of the merger, March 31st. So those unrealized gains
really all were generated during the quarter. All of the previous gains were
marked to market and realized at the time of the merger. Actual cash returns on
that portfolio have been far greater than that, but the only quarter results
that we just stated are reflected now.
Rich Herr:
Alright terrific, thanks. Good quarter.
Eric Billings:
Thank you.
Moderator:
Thank you. John Race, your line is open. Please state your company name and you
may ask your question.
John Race:
Guys, calling this a good quarter would be the understatement of the century.
Uh, this is a great quarter. Congratulations to all of your for your transition.
I wanted to ask a couple of questions with regards to the MBS spreads at this
time. Did you say, Eric that they're today at 2.16, is that right?
Eric Billings:
Specifically, what I said, John is that at the margin today when we put on new
assets, given the falling CPRs we would put them on at a spread of approximately
2.16. It also has the effect of the CPRs really do run across the entirety of
the portfolio, and effectively if everything stayed as they are right now then
our spread would be approximately 2.16 for the quarter. And so I think a good
way to look at that portfolio, certainly as we look at it, we have finally
achieved our 8 billion dollar portfolio size that we intend to approximately
maintain at this level of tangible equity. And we have a spread as I just stated
again that would be about 216 bases points. Again though, if CPRs continue to
fall, which seems fairly likely, then that spread will continue to increase. But
in any case if you multiply the 2.16 times the 8 billion, and then you add in
the portion of our equity that has no cost- funding cost associated with it,
you'll get the total spread-based earnings from that portfolio going forward.
And when you do that analysis, you'll see that that will cover up the dividend
by itself at this point.
John Race:
So, with your leverage at seven and a half times then, and the CPRs falling,
would you foresee, because our leverage is conservative to possibly increasing
your leverage, taking advantage of the widening spreads?
Eric Billings:
No we really wouldn't John, you know, we try to maintain a structure that is
reflected and A) the adjustable rate made for the assets and B) the leverage
factor so that under virtually any circumstance that we have seen or test- back
tested as far as we can go, we would never be in a position where permanent
damage could be done to the company or to the balance sheet, and even though
that means from time to time we leave a little earnings on the table, returns on
equity that are on average have been north of 20 percent and as you know
sometimes as high as the low 30 percent are completely acceptable to us and we
really just don't think it's worth trying to earn a little bit more and take on
any incremental risk.
John Race:
Ok, with regards to the unrealized gains that you reported at the end of the
quarter on the MBS report portfolio, is that $34.8 million, with the latest fall
off in prices and increase in yield in the bond market, what has that negatively
impacted your unrealized gains so far here in July?
Eric Billings:
Yes it has, John. As Rick just said actually, the gains in the portfolio are
essentially zero and the mortgage back security part of the balance sheet. So
they have gone down a little bit, as expected. But again, remember our duration
is very short, our assets are all adjustable so these activities are really not
meaningful to us in any case.
John Race:
Right. And um, just reaffirming the special dividends, when would you report
that, would that be- would that go after the end of the year sometime?
Eric Billings:
That would be our anticipation, John, just as we did formerly with FBR Asset, we
would do it at the end of the fourth quarter.
Emanuel Friedman:
John, what we said is we would look at a special dividend.
John Race:
Oh ok.
Emanuel Friedman:
If our earnings continued.
John Race:
Ok gentlemen, good job, keep up the great work.
Eric Billings:
Thanks John.
Moderator:
Thank you. Mark Patterson, your line is open. Please state your company name and
you may ask your question.
Mark Patterson, NWQ Investment Management:
NWQ Investment Management. Really great job guys, nice quarter. I wanted to ask
a couple of questions on the MBS portfolio, I thought I just heard you mention,
or the caller just mention seven and a half times leverage. I don't see that you
put an average leverage in the press release but at period end it looks to be
closer to ten to one, I was just curious how you calculated that.
Rick Hendrix:
Right, Mark, the MBS portfolio alone is in the range of ten to one. The seven
and a half is the company's overall leverage.
Mark Patterson:
Oh ok. So at ten to one, you're kind of at your higher end of the range.
Eric Billings:
Right well, we've...
Mark Patterson:
Six to eleven or something like that.
Rick Hendrix:
Right, we've always expressed our range was six to eleven times and it was said
I think in the last few conference calls between FBR Asset and the merged
company, we have been trying to achieve full leverage in what's been a very fast
prepayment speed environment. And we feel like we've gotten there here at the
end of June 30th. So we've reached the target leverage we want to be at as Eric
mentioned, we expect to maintain roughly this type of leverage and balance sheet
going forward.
Emanuel Friedman:
But remember Mark, one of the things that we're also not only anticipating what
has been fast or prepayment rates but also the fact that we are growing and
retaining our tangible equity through the capital markets side of our business
and so we are also forward looking a little bit and understanding that our
tangible equity is growing until we have the assets on- somewhat in anticipation
of that activity.
Mark Patterson:
Right, that sounds great. Another question on the- on the- today's rate of
spread that you're putting on 2.16 I think you mentioned from 1.99 as an average
for the second quarter. So that takes into account the fact that you did, you
know the (inaudible) of the $3 billion and the $2 billion new one year rate
swaps. Does that include that effect?
Rick Hendrix:
The 2.16, Mark, is literally, if we use the same mix of assets that we have from
a one-one, three-one, five-one perspective, and funded today between one-ten and
one-fifteen which is where, you know, marginal funding costs are. That's what
drives the 2.16 percent spread on, well we'll call it new business. It does not
reflect the one thirty one cost for the new swap because they don't kick in
until October.
Mark Patterson:
Oh ok, because you know, eighty or eighty-five basis points on a couple billion
dollars, I guess that could bottom line to about twelve cents a share annually,
so it'd be three cents on a quarter, that sounds about right. But that takes
effect in October? Or is that just a lock-in rate of something that you have
right now?
Rick Hendrix:
It's just a locked in rate that starts in October, and it's only about twenty
basis points higher than our marginal cost of funding today.
Mark Patterson:
Ok, ok that makes sense. Question about the merchant banking portfolio, uh, you
know, nice to see the $56 million of unrealized gains there. And I guess you
mentioned that you did twelve million of realized gains in the quarter. Do you
have plans, at 164 million dollars, do you have plans for activity in the third
quarter, I guess you like to be opportunistic, but do you have equity set aside,
or is there a target level of how much capital you'll put that way?
Emanuel Friedman:
We have one, we have one commitment of twenty-five million dollars to an
insurance company that we're marketing right now, $650 million, 144 a
transaction. So we have committed twenty five million dollars to that
transaction because we think the returns will be more than our Mortgage Backed
portfolio.
Eric Billings:
And that's the key, Mark, as you know, it's not a particular strategy which
allows us to say we intend to allocate a certain amount of our equity capital at
any given moment, it's a strategy which always matches everything against the
returns we achieve on the Mortgage Backed Security portfolio and went on a
risk-adjusted basis over the course of the next year, we believe we will achieve
higher returns than we invest accordingly. So it tends to be somewhat lumpy, and
there's no particular necessary, natural allocation process that would take
place.
Mark Patterson:
Alright, it was a great quarter. Appreciate your work, thanks.
Eric Billings:
Thanks Mark.
Moderator:
Thank you. Joe Stieven your line is open. Please state your company name and you
may ask your question.
Joe Stieven - Stifel Nicolaus:
Hi guys, first of all good quarter again, both Mark and John answered some of
the questions, but I still want to drill down a little bit more on the MBS
portfolio, because I'm just trying to model about when the prepayment speeds
slow, can you give us a little sensitivity what type of improvement you're going
to see in your margin, because you're talking about new spreads right now at
2.16. Is that list the slower prepayment speeds, or is that running the current
pre-payment speeds that were in the second quarter? That's really it, thanks
guys.
Rick Hendrix:
Sure, Joe, the 2.16 is basically buying today at an anticipated prepayment speed
of twenty-five.
Joe Stieven:
Ok.
Rick Hendrix:
Now what we've been experiencing as we put in the press release and discussed is
thirty-five. If prepayment speeds were to fall by ten from thirty-five to
twenty-five, that would have roughly a thirty-five basis point impact on our
yield, and increase our yield by thirty-five basis points.
Eric Billings:
So that's kind of...
Rick Hendrix:
On existing portfolio.
Eric Billings:
Joe, to specifically answer your question, that's kind of the proportionality
and a rule of thumb that you can use so if it goes from thirty-five to
twenty-five, we pick up north of thirty basis points and spread. If it went from
twenty-five to fifteen, we would actually pick up even more because of the
obvious change in proportionality from thirty-five to twenty-five, twenty-five
to fifteen, but as a rule of thumb, that's the way it will work.
Joe Stieven:
And while the mortgage market has backed up recently, I mean, a lot of people
said you're probably, most people would probably run pretty high prepayment
speeds this quarter just as a lot of- just because of the pull through. So what
are your thoughts on what you'd guesstimate your prepayment spreads to look like
this quarter?
Eric Billings:
You know, Joe, I would say that they're going to- they'll look lower than they
were in the second quarter. It is for the reasons you said, there is a lag
effect, so it's hard to pre- precisely predict. But clearly it should be lower
and possibly considerably lower by the end of the quarter than it was in the
second quarter.
Joe Stieven:
Ok, and I guess, final two questions: If you took the assets on the MBSs, if you
sort of put them in buckets of one year arms and three year arms, can you sort
of tell us a little bit about how you would split them out that way?
Rick Hendrix:
Sure, we roughly have twenty percent in five-ones. And because we have a lot of
seasoning in the portfolio today, we actually stratify these by where the roll
basis are.
Joe Stieven:
Right.
Eric Billings:
And so you've got about twenty percent in five-ones, you've got a bigger
proportion, about thirty-five percent in three-ones, and then you can fill in,
of four-ones and two-ones, which don't really exist, I mean they're not market
products, that's where our assets have rolled down to.
Joe Stieven:
Right.
Eric Billings:
To have another thirty percent in the two-one area, and about seventeen,
eighteen percent of what I'll call a four-one, and the balance are short, are
one-one.
Joe Stieven:
And I guess final question is then, what would be your weighted average for all
your borrowing as far as the duration of your borrowings that have matured on
your borrowings?
Rick Hendrix:
Well, on the borrowings today, as we mentioned, we have two billion of swaps
that go out through October of '04.
Joe Stieven:
Right.
Rick Hendrix:
So the weighted average is over six months.
Eric Billings:
And Joe, you know, again, our intent is to extend that out up to two-thirds of
that when it is economically attractive to do that. And clearly, we're in a
world right now where that is, if not completely then substantially true, so
this is an activity you could reasonably expect to see us continue to add to the
portfolio.
Joe Stiven:
Ok. Ok, nice quarter guys.
Eric Billings:
Thanks Joe.
Moderator:
Thank you. David Stadlin, your line is open. Please state your company name and
you may ask your question.
David Stadlin:
Yes, Weintraub Capital Management. Just on the Mortgage Back Securities
portfolio and the REIT subsidiary, can you just tell us what the equity in the
REIT is at the end of the quarter? Just so I can understand, again, what you
were talking about in terms of spread and the spread on the equity portion.
Rick Hendrix:
David, roughly the equity that's in both the merchant banking and the Mortgage
Backed portfolio is about 860 million dollars.
Eric Billings:
Which is what we keep in the REIT.
David Stadlin:
Ok, and if we're thinking about just the third quarter, is $8.1 billion, would
that be a reasonable number to sort of keep constant throughout the quarter, or
is there room to grow the portfolio given the backup in rates and the increasing
spreads here in the most recent time period?
Eric Billings:
No, David, really I think you should look at an $8 billion dollar portfolio as
what a portfolio size that we're comfortable with and on average we would intend
to maintain. Now remember, we are growing our tangible equity capital through
our capital market businesses, and we put that back capital over into the REIT,
and so if that continues, we would then grow the portfolio. But as of today's
level of tangible equity, we would maintain a leverage ratio that you see and
keep it about 8 billion. Again, achieving returns and equity that are north of
twenty percent, somewhere in the twenty-three, twenty-four percent return on
equity level, which is completely acceptable to us. We also believe it is
somewhat understated because we are experienced in higher than normal CPRs as
you know, if you normalize, for instance, to what have been historically average
CPRs, and clearly you have to adjust the different asset types. But the spread
that maybe, the more average spread on the portfolio would clearly be
considerably wider than it is today, resulting in a true return on equity that's
even higher than we're achieving today. All of these are levels that we are
completely comfortable with and we don't feel it's necessary to add any
component of risk even very far-fetched risk to achieve slightly higher returns,
so really it's our policy that we're going to maintain the leverage balance
approximately where it is.
Rick Hendrix:
And David, just to be clear on the capital in the REIT, when you include some of
the assets that have previously been at FBR Group that are now housed in the
REIT, the total capitals in excess is $900 million.
David Stadlin:
Ok. And um, just again, question seems silly, and maybe I'm missing something
very simple, but um, when you say that if CPRs go down, your spreads would
increase, I don't see the connection necessarily.
Eric Billings:
Ok, now let me explain it to you, because I understand the question, and it's a
good question. The simple way to look at it is this: the premium on our
portfolio today is about 2.4 percent, now, the way that we amortize that premium
is over the anticipated life of the asset. The CPR measures and reflects that
anticipated life to the degree that you have a high CPR, in this case say
thirty-five, it means that you're amortizing the premium over something in the
vicinity of 2.6, 2.5, six, seven years. Now when the CPR would then drop, for
instance, to say twenty-five, you would then be amortizing that premium over
four years.
David Stadlin:
Right.
Eric Billings:
You see, so that's why the spread is affected fairly dramatically by that change
in CPR. Very important to remember though, on a cash basis, the true number is
much higher than is actually reported and this is an accounting basis that
requires that the portfolio amortize that premium up on the expected life.
David Stadlin:
Ok, alright, I understand it now. Ok, thank you very much. Great quarter.
Eric Billings:
Thanks David.
Moderator:
Thank you. Lauren Smith, your line is open. Please state your company name and
you may ask your question.
Lauren Smith:
Hi, good morning, KBW. Just a simple question, I think, and stems more in a
30,000 foot view. With the institutional brokerage business, you know, clearly
your strength in underwriting this quarter helped fuel that component, but what
balance of that would you say is sort of equity and fixed income driven and sort
of tied to your investment banking business, and I'd just be curious what you're
seeing now in terms of client flow and demand and with the, you know back up in
rates so dramatic over the past couple weeks. Have you seen sort of a shift in
client demand?
Eric Billings:
You know Lauren, I would answer that in a couple of different ways. First, you
know, very clearly we are, as we stated, seeing a very broad, deep expansion of
the back log in the level of activity in our investment banking business for the
company. And that pace really has continued to grow since really, since,
certainly since the merger in a significant way, but I think I would have you
look at the- reflect on the fact that really, for the better part of the last
two years now, over two years in fact, that's been happening to the company. The
level of interest rate really has had virtually no effect on the back log of
activity, and I would say no effect meaning it hasn't had a positive or a
negative effect. And so, the factors that are leading to this greater level of
business, as Manny said, and many of the things he said in his discussion, is
the level- greater level of understanding of our franchises certainly the fact
that with a company has a market cap now which is much larger, corporate clients
are willing to look it up in a different way. I know it's an intangible, when we
were on the road and tried to explain to many of our clients that this, we
hoped, would be an effect, it's a little bit hard to convey, but it is a very
powerful phenomenon that is taking place. So it's pervasive and it's deep, it is
across all of our sectors and it is also reflected in the fact that we are
maintaining client relationships at a greater level, that's been going on for a
long time now. It is reflected in the fact that we are doing greater levels of
fixed income activity, we are now, actually have over four transactions in the
fixed income, high yield preferred area that we are involved with or have
completed. And it also reflects higher levels of advisory and M & A activity. So
it's fairly comprehensive, and it is a factor based on all of these different
activities has really caused this to occur, and we think will continue to
accelerate and grow in the future.
Emanuel Friedman:
Lauren, this is Manny, as Eric just said because the activity has increased so
sharply in investment banking, it's continuing to have a very, very positive
impact on all parts of our business, including the sales and trading area. We
did our Equity Inns, which was 75 million dollar preferred deal already this
quarter. As Eric said, we have about four to five other fixed income deals,
transaction deals, that are almost about to start, with our first large,
diversified IPO's in the alarm business. We just did, last night another
traditional REIT underwriting, we have a very, very large insurance transaction.
That's an area that's expanded for us... (inaudible) technology for the last two
or three years... (inaudible) 154 million dollars of secondary that we're on the
road with, technology has been an area for us that's been very, very quiet...
(inaudible)
Lauren Smith:
Thank you
FBR Representative:
Thank you Lauren
Lauren Smith:
Alright thanks everybody, appreciate it a great deal.
Moderator:
And I am showing no further questions at this time.
Emanuel Friedman:
Okay. Thank you very much. We appreciate, we appreciate the interest.
Eric Billings:
Thank you.