- The Washington Times - Tuesday, March 18, 2003

Shares of FBR Asset Investment Corp., an Arlington real estate-investment trust, jumped yesterday after the Federal Reserve approved the spinoff company's merger with FBR Group Inc., an Arlington-based financial holding company.
The new company would operate as a real estate investment trust, or REIT, a company that owns income-producing commercial real estate.
If the merger is approved by a shareholder vote on March 28, FBR Group would be phased out of the combined company within six months of the merger and operate primarily as an REIT to get tax savings, said Bob Leahy, spokesman for FBR Group.
REITs distribute 90 percent of their taxable income to shareholders as dividends, and those dividends are deductible on corporate tax returns.
The merger would also consolidate the corporate structure of FBR Asset, which has been externally managed by FBR Group since it was formed in 1997 as a division to invest in real estate companies.
FBR Group, a separate public company, owns about 11 percent of the unit.
The combined company would convert stocks for the companies under a new common stock.
Analysts say the merger would stabilize earnings growth for FBR Group while taking care of management structure problems that have arisen at FBR Asset. Erik Woodworth, assistant vice president for equity research at Cohen Bros. & Co., said there have been management miscommunications from the operating body, FBR Group, to FBR Assets.
"Instead of a dual corporate structure, the new company will have management [combined] under one main body, limiting a lot of problems," Mr. Woodworth said.
But FBR Asset investors are hesitant about owning a brokerage unit as part of the merged firm, Mr. Woodworth added. "Many investors want to just invest in a REIT, but with this merger, the shareholder would also own an investment-brokerage firm" that has another set of risks and benefits, Mr. Woodworth said.
While Mr. Woodworth is not changing his rating of FBR Asset outperforming the market, he said he's closely watching to see if the new company will produce tax savings.
"The main issue is if the new company will realize the savings it indicated would come from this merger."
Merger negotiations could also be affected by the trading price of FBR Group if it drops below $8.75 before the deal is finalized, said Joseph Stieven, analyst with Stifel, Nicolaus & Co. Inc., in his latest report on FBR Asset.
FBR Group closed yesterday at $8.99 on the New York Stock Exchange, up 44 cents from Friday. "While FBR stock has declined since the announcement of the merger, its performance has somewhat mirrored the general market," Mr. Stieven said in the report.
The two companies agreed to the merger last November, when FBR Group stock was at $9.50.
FBR Asset's price jumped $1.60 yesterday on the New York Stock Exchange to close at $32.60 from Friday's $31.
The merged company, which would be called FBR, is forecast to reach $174.7 million in profits ($1.52 per share) for 2003, Mr. Leahy said.
"Overall, the combined new company has sound potential," Mr. Stieven said in the report, changing his rating from "market performance" to a stronger one of "buy" after FBR Asset set a shareholder vote date for the merger.
FBR Asset's income rose sharply for the fourth quarter ended Dec. 31 to $34.6 million ($1.38 per share) from $5.6 million (88 cents) a year earlier. It boosted profits for the year to $84.2 million ($4.48) from 9.8 million ($2.17) in 2001.
Mr. Leahy said he expects the merger to go through this quarter. "The board of directors for both companies unanimously voted for this, and I think our shareholders will want it as well," he said.
Mr. Woodworth noted that opposing investors will likely sell the stock instead of voting against the merger. "If shareholders don't like the merger, they'll just get out of the company entirely because it looks like this will go through."

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