This investment banker leads the way by focusing on off-balance-sheet investment vehicles and hybrid REITs.

If you looked up the word creativity in the dictionary, what sort of picture do you think you would find next to it? A photograph of Arlington, Va.-based Friedman, Billings, Ramsey & Co. Inc. executives at work would be a likely choice.

"We have a very dynamic, very entrepreneurial spirit within the company itself, and it really starts at the top," says William R. Swanson, managing director, real estate. "The three principals of the firm have instilled throughout the company the ability to come in every day and contribute to your maximum abilities and to think independently and and to act with conviction on ideas that we see in the capital markets."

This creativity is exemplified in the way FBR structures many of its transactions. Oftentimes, FBR is the first in the market with a new type of structuring or product.

"We're introducing companies either on a follow-on basis or on an initial basis to a terrific group of investors, and ultimately the greatest strength we bring to the market is raising capital for companies," says Mark O. Decker Sr., managing director, real estate. "In that process there is a lot of structuring and creativity that takes place."

"It is perceived, and it is fact, particularly from the institutional investor capital that we represent, that our transactions are the most creative of any transactions they see from a structuring point of view," adds Swanson.

One example of this creative structuring was a deal completed on behalf of Walden Residential, a Dallas-based apartment REIT. This transaction was the first straight-preferred security that had been offered to the market with warrants attached to the common stock, says Swanson, adding that "this allowed us to rate the capital at a cost to them which was approximately 50 basis points below what a straight-preferred otherwise would have cost them."

FBR also created a new type of transaction that it calls a hybrid mortgage REIT. This resulted from a deal completed for Ocwen Financial. Because Ocwen had devoted certain asset types to the REIT structure and it was acquiring and managing loan portfolios and REO portfolios, FBR combined a mortgage operation with an REO operation, forming its first hybrid mortgage REIT.

"We were the first to introduce that to the market, and last year we raised $276 million of that transaction, and it has been an extremely well-received transaction," says Swanson. "That is an example of us creating a vehicle within the REIT format which the market had not seen before and which our investors widely accepted."

One of the most recent nontypical transactions for FBR was completed on behalf of Capital Automotive REIT, which FBR took public in February, closing at $300 million. The REIT owns automobile dealership assets nationwide and was created by FBR, which put together the management team and the board of directors. FBR also accumulated approximately $160 million of assets before taking the new company public.

"We think it is a very fascinating way for automobile dealership owners to liquidate their real estate holdings and to convert an illiquid piece of real estate into a highly valuable REIT security," says Swanson. "So as a net lease REIT, the auto dealer sells his real estate to the REIT in return for partnership units in the REIT."

FBR sees this latest type of transaction as the next phase of growth for its REIT business because, as REITs evolve and their core business becomes more defined, they have a greater ability to create off-balance-sheet vehicles that are well-suited to their core business.

"In addition to ongoing IPOs and secondary offerings which meet the current capital needs of our clients, we believe it's in the best interest of many companies to liquidate their real estate assets and put those assets to work in an off-balance-sheet investment vehicle," says Eric F. Billings, vice chairman and COO of Friedman, Billings, Ramsey. "The real estate industry is a $3 trillion industry, of which only approximately 5% is securitized. The potential is great."

"The whole idea of varied classes that have not even been thought of yet is something we are very, very focused on, and one example is the automotive REIT," adds James D. Locke, managing director, real estate. "There are a lot of other asset classes like that that you will see us getting involved in."

FBR's creativity, however, is based in reality by being highly focused on research. Swanson says that the percentage of people devoted to research compared to the total number of employees is approximately 20%.

"Today, our research firm has a percentage in total employees that is one of the highest, if not the highest, of any Wall Street firm," Swanson adds. "It ensures us of looking through to the underlying businesses that we raise capital for and understanding those businesses in great detail, which then again allows us to perform transactions which meet our clients' needs and our investors' needs."

Being research-driven can be traced back to the founding of the firm. FBR began in 1989 as a research, brokerage and asset management firm focused on identifying investment opportunities for institutional investors. Later in 1993, FBR added investment banking to its repertoire, to which the research lent itself well. In 1994, Swanson and Locke joined the firm to head up the real estate group. Soon following this, FBR did its first IPO for Prime Retail, a transaction which FBR solely managed and raised $350 million.

And it doesn't hurt the research and creative efforts to have well-seasoned professionals on staff. Decker explains that both the head of research, Tom Dryer, and the head of investment banking, Swanson, have had years of experience in real estate. Swanson has had almost 20 years in real estate - 18 of which were spent at LaSalle Partners, Decker says.

Decker is the former head of NAREIT, serving from the mid-1980s until about a year ago.

"Mark knows virtually all of the management of REITs throughout the country on a first-name basis," Swanson says. "When we think about talking to REITs and what transactions we might undertake, it's a tremendous benefit to have Mark on our team."

"Our team has stood in the shoes of many of our clients," adds Billings. "We know the industry, and we know the players. It's a great advantage."

Apparently this experience and research-based creativity is paying off well for FBR. Last year, it completed more than $2 billion in REIT transactions and a 1997 total of $4.7 billion in capital raising. Today, 51% of FBR's investment banking transactions are IPOs. And CommScan EquiDesk Data & Software ranked FBR as the No. 1 performing IPO underwriter in the aftermarket.

"When we make a decision to go forward and do an offering, it's a commitment from the investment banking group and ultimately, of course, our research group," says Decker. And FBR has never failed to complete a transaction once it has committed to doing the deal, adds Swanson.

Just last year, FBR itself went public, created a private REIT vehicle of its own called FBR Investment Corp. and formed a strategic alliance with PNC Bank of Pittsburgh in which PNC purchased just under 5% of FBR. This alliance will allow FBR to grow its asset management business, says Swanson.

"We're entrepreneurs," says Billings. "We're independent thinkers. Our approach has allowed us to develop and execute creative transactions like Capital Automotive REIT. It's how we're able to create an entirely new class of REIT - the hybrid mortgage REIT. We're always looking for the best solution to meet the capital needs of our clients - whether it's been done before or not."