FBR’s Flush First Quarter

FBR Group (FBR) swung to a first-quarter profit on the reversal of $73 million in pre-bankruptcy losses for First NLC Financial Services, the Company’s former subprime mortgage origination subsidiary.

FBR is continuing its return to a core strategy of managing a portfolio of agency-backed hybrid ARMs while utilizing its NOLs to shield itself from distribution requirements, though the Company said it will be reviewing reinstatement of the dividend over the next quarter. In any case, FBR is at least earning income at the REIT level once again -- although it had significant losses in the TRS.

The Company also said it was seeing haircuts on repo financing remaining stable at about 5% for its agency-backed portfolio. FBR expects to return to a cash operating profit by the end of the third quarter.

Investors liked what liked Chairman Eric Billings had to say, sending the stock higher by about 12% at last check. Nonetheless, FBR is still trading at just 85% of its 3/31 book value, and with net interest margin continuing to widen, FBR might just be a steal at these levels.

FBR Framing Future

Friedman Billings Ramsey (FBR) has done a nice job winning me over ever since I questioned their use of the REIT structure a couple months ago. At that time, I wondered if FBR might be considering a partnership conversion. After reading through the Q407 earnings call transcript, I think FBR is back on track to succeeding as a REIT.

FBR has done an excellent job of restructuring its balance sheet, dumping the riskiest assets and eliminating commercial paper as a source of funding. The company has deployed the capital freed from asset sales into the purchase of agency-backed securities, a return to FBR's "core business, the conservative substantially hedged agency mortgage backed security strategy."

Most importantly, FBR has set itself up to generate qualified REIT income through its mortgage management segment, which may help FBR to monetize its $372 million of net operating loss carry-forwards and $268 million of capital loss carry-forwards. At a minimum, the NOLs will allow FBR to retain tax-free earnings at the REIT and shield the Company from a dividend obligation. It may choose to repurchase shares, since FBR is trading once again below economic book value of $3.10/share (including the expected FNLC recovery).

FBR very nearly destroyed itself by trying to do too much within the REIT umbrella, as active mREITs and those with numerous nonqualified activities can quickly stretch themselves too thin.

FBR Throws In Towel on First NLC

FBR announced that First NLC Financial Services, FBR Group's mortgage origination subsidiary, will liquidate its assets in Chapter 11 bankruptcy as a result of the continued deterioration of the non-prime market.

In addition, FBR Group announced that it would not close the previously disclosed recapitalization and sale of FNLC. In connection with the expected Chapter 11 filing, FBR Group does not expect to recover its remaining $12 million investment in FNLC.

FBR Tries to Shake Things Up

Update: FBR's Investor Relations was kind enough to reply to my inquiry regarding REIT qualification maintenance. FBR believes it will be able to continue operating as a REIT for the foreseeable future, even after the asset sales.

Friedman Billings Ramsey (FBR) is trying a new approach to boost its sagging share price. The Company announced today that it is doubling its share repurchase authorization while suspending its common dividend. It's a logical move, given that shares are trading at less than 60% of book value. Furthermore, although FBR doesn't disclose estimated taxable income, the realized losses from the sale of certain of its subprime loans will likely drive a taxable loss for the fourth quarter, eliminating any dividend obligation.

FBR is also selling its $3.1 billion on-balance sheet residual interests, which represents about 60% of the balance sheet. The sale will insulate FBR from recognizing mark-to-market losses on the residual interests (since the liabilities cannot currently be marked down simultaneously until FAS 159 is adopted), but it does raise the question of how FBR will satisfy the REIT qualification tests going forward. Selling the on-balance sheet residuals and other nonconforming loans will reduce qualified REIT assets precariously close to the 75% threshold.

I suspect that FBR may be considering a conversion transaction to a partnership (similar to what KKR Financial did earlier this year) to allow it to diversify its business activities outside of the sagging real estate market. Given that the capital markets segment (a TRS) is the only profitable segment for FBR right now, the REIT structure doesn't appear to be providing the maximum benefit to the Company.

Betting Big on FBR

A review of Form 4 filings for Friedman Billings Ramsey (FBR) reveals that John Howard Burbank III's Passport Capital vehicle has upped its stake in FBR by almost 5 million shares in the last month, with 500,000 of those purchased shares coming in just the last week. Burbank now owns approximately 11.8% of FBR's outstanding Class A common shares. The most recent 5 million share purchase was completed at an average price below $3.00/share, as compared to FBR's $5.03/share book value.

FBR is a complicated animal is that it is essentially a mortgage investor, mortgage banker, and brokerage house structured as a REIT for tax purposes. It's difficult to gain much visibility on FBR's future prospects, given the conflicting forces in the credit environment. Many REITs are doing preferred offerings to raise cash, but few REITs are doing common offerings right now. Therefore, it's difficult to determine the future prospects for the capital markets end of the business, FBR's most profitable segment.

Nonetheless, FBR is trading at a significant discount to book value, and even if the company takes additional writedowns on its mortgage investments, the capital markets business should remain profitable enough to support a reasonable amount of the existing book value.

FBR Takes Big Third Quarter Bath

FBR Group reported third-quarter results earlier today, posting a quarterly loss of $1.28/share. The results were significantly weighed down by a number of hefty charges, including:

The four principal components of the third quarter results are:

• $90 million of write downs and losses relating to the company's on-balance sheet securitized loan portfolio ("residual interests") that reduce the company's economic risk in this portfolio to zero,
• a net loss of $67 million from the company's mortgage-backed securities portfolio and operations, including the previously announced $57 million loss on the sale of approximately $4.95 billion of agency mortgage-backed securities,
• an economic loss of $17.2 million(2) associated with restructuring and operating costs at First NLC Financial Services (FNLC), of which $15 million was incurred prior to the agreement announced in July to sell FNLC to an affiliate of Sun Capital Partners (Sun Capital), and
• a $27 million valuation loss relating to the portfolio of conforming and non-conforming loans originated by FNLC and for which FBR Group took ownership under the Sun Capital sale agreement, reducing the value of those loans to $203 million.

Consolidated book value fell to $4.36/share. "Economic exposure to our securitized, non-recourse mortgage loan portfolio has been eliminated, and our remaining exposure to FNLC is $12 million," said Eric F. Billings, Chairman and Chief Executive Officer of FBR Group.

Friedman Billings was sinking 5% in light pre-market trade.