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To: Dale Baker who wrote (31985)	12/11/2002 5:22:42 AM
From: Dale Baker	Read Replies (1) \| Respond to of 118717

from bull market report by: zzzuff 12/10/02 02:22 pm Msg: 6323 of 6339 Monday, December 9, 2002 part 1 SPECIAL REPORT ON FRIEDMAN, BILLINGS AND RAMSEY GROUP AND FBR ASSET INVESTMENT There is big news afoot at FBR Asset Investment (FB) and Friedman, Billings and Ramsey Group (FBR). Bill Miller of Legg Mason Opportunity Trust and Legg Mason Capital Management, an investment fund with $20+ billion under management, has bought 1.1 million new shares of FB at Friday's closing price of $33.65. Legg Mason Opportunity Trust bought 1 million shares, while Legg Mason Capital Management added 100,000 shares to its holdings. That's $40 million of new capital for FB to invest and get their 20% return on equity! And it appears likely that Miller will buy up to another 1 million shares in the open market in the next few months. Additionally, Miller owns 200,000 shares personally. This is very, very big news. Miller is one of the greats in the fund business, on a par with the legendary Peter Lynch of Fidelity. With his purchase, Miller has made a huge statement about FBR -- FB too, but mostly FBR, since FB will become FBR in February. THE DETAILS OF THE MERGER Here again are the details of FBR's purchase of FB. FBR will exchange 3.65 of its own shares for every existing share of FB. The new annual dividend payout will be $1.37 per share, which amounts to $5.00 for every current share of FB. So the dividend will be the same. (FB may pay a special dividend on top of the $1.25 quarterly rate, and we should hear that any day now.) The deal will finalize in February, and the new company will trade under the FBR ticker symbol. FUTURE PROSPECTS Once the merger is complete, the combined company will be a greatly improved version of the former investment bank and Mortgage REIT. The new firm will have the stable earnings and dividend production from FB, which has been a cash cow as a Mortgage REIT. But unlike other REITs, FBR will have the full resources of a top-notch investment bank -- Friedman, Billings and Ramsey Group -- providing the company with solid earnings growth. The combination of these two firms will make FBR a driving force in the future. FBR's investment banking operation is expected to make $30 million in after-tax earnings and grow profits by 30-35% per year, which it has been doing since its inception in 1989. In five years, total after-tax earnings should reach over $100 million, just from the IB side. FBR has about $230 million of capital but the investment banking side only uses $50 million to sustain itself, so the extra capital will go over to the Mortgage REIT side of the company to be invested for a ROE of 20+%. The Mortgage REIT side (FBR Asset Investment) makes $150 million a year now, on $725 million of capital. As the IB side of FBR adds $350 million or so to this number over the next five years, the earnings potential will explode. By leveraging itself 8 or 10 times to 1, the Mortgage REIT operation will use the new capital to buy government-backed mortgage assets like Fannie Maes and Freddie Macs. The MR side, then, should earn a return of 20% on this added equity. Overall, the company should grow by 20% annually, while investors receive an additional 15% return from dividend payouts each year. The previous sentence is so powerful that it deserves to be read again. The new firm will be classified as a REIT, requiring it to pay out at least 90% of earnings to its shareholders. We believe that FBR will increase its dividend payout even more in the future. We like the new FBR a lot and strongly recommend this company. We believe that Wall Street doesn't understand Mortgage REITs, and with the combination of the investment bank with the MR, you have another entity that Wall Street will need a year to understand. This gives you plenty of time to accumulate shares, collect the huge 15% dividends, and sit back and watch as investors discover the stock. This is the way fortunes are made in the investment business.