Until the two companies merged, FBR Asset Investment Corp. was a publicly traded company that FBR Group managed while owning 11 percent of the firm. The relationship between the companies was mischaracterized in an article in the March 31 Washington Business section. (Published 4/2/03)

It's weird, all right.

Arlington-based Friedman, Billings, Ramsey Group Inc., or FBR as it is known around town, is becoming a real estate investment trust.

Never heard of FBR?

Apparently that was a big problem for the mid-cap investment bank -- and one of the prime motivations behind the merger between FBR and FBR Asset Investment Corp., the mortgage holding company that had been a subsidiary of the bank. Under the merger, the two companies will essentially flip, with the investment bank becoming a tax-paying subsidiary of the holding company, a real estate investment trust (REIT).

FBR executives said the new firm will remain primarily an investment bank and brokerage, just one with the tax benefits of a REIT.

The market capitalization of the merged firm will be about $1 billion, and Eric Billings, FBR vice chairman and co-chief executive, said that should get the bank more attention.

"It gives us the prospect and the currency to be very attractive," Billings said Friday after shareholders of the two firms overwhelmingly approved the merger. Shares of the new combined company are to begin trading today on the New York Stock Exchange under the FBR symbol.

FBR executives said the merger of the firms, which will retain the FBR name, should stabilize earnings and bring in new business.

The investment banking business has been hit hard by the collapse of the dot-com industry and the overall downturn in the markets. Its income stream is hardly stable, although it has growth potential when the market is up.

For instance, FBR went from a profit of $18.1 million in 2000 to a loss of $12.7 million in 2001 to a profit of $53.3 million in 2002

The REIT business, on the other hand, is fairly stable, if stodgy, with consistent revenue.

"We are relatively speaking a relatively unknown company," Billings said. "One of our great challenges has been when we go see the mid-cap and small-cap boards [of directors] is explaining who we are."

During 2002, FBR completed or advised on 98 investment banking transactions. It also managed or co-managed five initial public offerings and 30 secondary offerings, including offerings for other REITS.

Billings said FBR does not expect to lose business from other REITs once it becomes one itself.

The merger creates the only real estate investment trust of its kind in the country, and REITs are already pretty odd financial creatures.

A REIT is a company that owns and, in most cases, operates real estate such as apartments, shopping centers, offices, hotels and industrial properties. Some REITs, such as FBR Asset Investment, also engage in financing real estate. Those types of REITS represent just a fraction of the larger industry, according to the National Association of Real Estate Investment Trusts.

FBR Asset invests directly in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and in other AAA-rated securities and loans.

Emanuel J. Friedman, chairman and co-chief executive of FBR, said this minimizes the risk to shareholders.

Robert L. Losey, associate professor of finance at American University, said shareholders will not see huge benefits from the merger. But he said there will be some.

As a real estate investment trust, FBR is required to distribute annually at least 90 percent of its taxable income to its shareholders. FBR is then permitted to deduct those dividends from its corporate tax bill.

"I'm not sure it makes that much difference to investors in FBR," Losey said. "They're not going to get much benefit to owning in the REIT. But I also don't see any significant downsides to it. A bigger cap company may get more visibility, and visibility usually translates into a slightly higher stock."