Opteum Inc. (NYSE:OPX)
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Opteum Inc. ("Opteum", the "Company") (NYSE:OPX), a real
estate investment trust (REIT) that operates an integrated
mortgage-related securities investment portfolio and mortgage
origination platform, today announced financial results for the
quarter ended June 30, 2006. This release should be read in
conjunction with the Company's Form 10-Q, which was filed this morning
with the Securities and Exchange Commission.
For the quarter ended June 30, 2006, Opteum had REIT net income of
$7.52 million, or $0.31 per weighted average Class A Common Share
outstanding. The REIT had estimated taxable income of $9.99 million,
or $0.42 per weighted average Class A Common Share. Taxable income
includes payments made by the Company's taxable REIT subsidiary,
Opteum Financial Services (OFS), to the REIT of approximately $2.2
million of interest on the loans that the REIT has made to OFS, which
is eliminated in consolidation of the subsidiary.
Opteum Inc., which includes the results of OFS, recorded a
consolidated net loss for the second quarter of 2006, on a GAAP basis,
of approximately $3.69 million, or ($0.15) per weighted average Class
A Common Share as of June 30, 2006.
The Company's reported net loss for the second quarter is mainly a
result of the change in value of assets held by OFS, which flow
through the consolidated statement of operations, some of which have
increased in value and some of which have decreased in value.
First, the Company's adoption of SFAS 156 during the first quarter
of 2006, which pertains to the valuation of Originated Mortgage
Servicing Rights (OMSR), requires the Company to use the fair value
method for valuing all OMSRs. As a result of this adoption, changes in
the fair value of the OMSRs over a given period will be reflected in
earnings. This change allows the Company to more effectively hedge the
OMSRs compared with the treatment available under SFAS 133. OMSR's
resulted in an increase in OFS's earnings of $3.3 million (pre-tax),
or approximately $0.14 per weighted average Class A Common Share
during the second quarter of 2006.
Secondly, the net change in the value of retained interests in
securitizations that OFS has issued from its two private-label shelves
declined in value during the second quarter of 2006. The change in the
value of these residuals flows through the statement of operations of
OFS. The increase in one-month LIBOR of 50.5 basis points during the
second quarter of 2006, as well as related movements in forward LIBOR,
were the primary reasons for the valuation decline and the resulting
non-cash charge of $15.8 million (net and pre-tax) in the second
quarter of 2006 or $0.69 (net and pre-tax) weighted average Class A
Common Share. The valuation is subject to fluctuation over time due to
the differences between actual and projected prepayments, losses on
the underlying loans and the changing value of LIBOR.
Although the Company estimates that the book value per weighted
average Class A Common Share outstanding as of the close of business
yesterday, August 7, 2006, was between $8.45 and $8.60, the book value
of the Company as of June 30, 2006 was $8.22 per weighted average
Class A Common Share outstanding or approximately $200 million. The
recovery in book value per weighted average Class A Common Share
outstanding can be attributable to favorable changes in the forward
LIBOR curve and lower treasury rates since the end of the second
quarter, offset by application of the effective yield method
adjustment for the third quarter.
The change in the book value of the Company during the second
quarter of 2006 is detailed as follows.
The net change in value of the OMSRs and the net change in value
of the residual interests represent approximately $12.5 million (net
and pre-tax) or $0.51 (net and pre-tax) per weighted average Class A
Common Share outstanding of the decline in the book value of Opteum
from March 31, 2006 to June 30, 2006. The decline in book value in the
second quarter of 2006 is also attributable to a decline in the market
value of the mortgage related portfolio held by the REIT of
approximately $7.47 million or $0.31 per weighted average Class A
Common Share. Moreover, the application of the effective yield method
of accounting, which requires the Company to recapture excess
amortization expensed in earlier periods back into the value of those
assets in the quarter the accounting change is applied, increased the
cost basis of many assets during the second quarter of 2006. The
difference between the new costs basis and current market value of
those assets widened in spread, resulting in an increase in
"accumulated other comprehensive loss," a non-cash item. The
application of the effective yield method adjustment for this quarter
resulted in the addition of approximately $14.7 million or $0.61 per
Class A Common Share outstanding to the cost basis of the Company's
assets. Finally, the remaining $0.14 decline in book value per
weighted average Class A Shares Outstanding can be attributable to the
conversion of 1,223,208 shares of Class A Redeemable Preferred Stock
and other items.
Opteum announced a $0.25 dividend in the second quarter that was
paid on July 7, 2006. That dividend was paid out of Opteum's REIT
taxable income. The dividends were not a return of capital. Based on
the Company's previous timing of dividend announcements, the Company
expects that the Board of Directors will declare a third quarter 2006
dividend in early September 2006.
The increase in REIT taxable income in the second quarter of 2006
is a result of the increase in the coupons of the Company's
adjustable-rate mortgage assets, the slower rate at which they are
currently prepaying and the slower projected prepayment speeds going
forward. As noted earlier, the Company employs the effective yield
method of accounting, which requires retrospective adjustments to the
yield on the Company's assets, which in turn directly affects
earnings. The Company records a yield at the time of purchase of each
asset. To the extent the coupon or prepayment speed differ from
Company estimates made at the time of purchase, the Company is
required to adjust the yield on that asset as well as the amortization
of premium or discount taken to date on the asset. This cumulative
"true up" of the amortization is taken through earnings in the current
period. At the time of purchase the Company assumes that the index
rates on its ARM securities will remain unchanged over the life of the
asset. The substantial increases in index rates, particularly LIBOR,
which has increased over 400 basis points over the previous two years,
have resulted in substantial cumulative adjustments to yields
recognized in earnings on our portfolio.
In September of 2004 and December of 2004, respectively, the
Company completed an IPO and a public secondary offering. Many of the
assets that were purchased as a result of those successful offerings
are now resetting to higher coupons. In addition, because the longer
end of the yield curve has increased in rate during the second quarter
of 2006, the homeowner was not in a position to refinance as readily
from an adjustable-rate mortgage into a fixed-rate mortgage - as had
been the case in previous quarters when the yield curve was flatter.
The Company believes that its strategy of owning low-duration,
adjustable-rate assets has proven to be successful. As of this date,
the Company has not realized any net permanent losses to book value as
a result of portfolio restructuring.
The Company has not made any significant changes to its portfolio
strategy since the summer of 2004, when the Company determined to
substantially increase the asset allocation to adjustable-rate
mortgages - those mortgages whose coupons reset within 12 months. By
the fall of 2004, this was accomplished. Following this change, the
Company has had the highest cumulative dividends and the highest
cumulative return on equity for the following seven quarters compared
with the Company's 2005 RMBS peer group, as spelled out by the equity
research analysts who cover the sector.
In light of the continued increase in both LIBOR and treasury
rates during the second quarter of 2006, the Company decided in late
April 2006 not to reinvest the proceeds of principal and interest
payments until there was an indication from the Federal Reserve that
the bias of that committee was changing from a restrictive or
tightening bias to a neutral bias. The June 29, 2006 economic
assessment released in the minutes of the Federal Reserve's Open
Market Committee (FOMC) meeting did change to "data dependent" from
"balanced," meaning that, should forthcoming economic data indicate a
slowing economy along with modest inflation, the FOMC would be in a
position to restrain from raising rates further. The results of that
assessment are expected to be known later today when the FOMC meets.
Commenting on the results, Jeffrey J. Zimmer, Chairman, President
and Chief Executive Officer, said, "The Opteum Board of Directors is
pleased to be able to pay favorable dividends for the second quarter
of 2006, but we are eagerly anticipating the time when the increases
in short-term funding rates come to a halt. The Board was pleased to
see forward funding rates decline in the first month of the third
quarter of 2006, which will lower borrowing costs for future
transactions and increase book value now."
Mr. Zimmer continued: "As of June 30, 2006, the Company held $3.4
billion of REIT eligible mortgage-backed securities at fair value. As
of June 30, 2006, the weighted average yield on these assets was 4.78%
and the weighted average borrowing cost was 5.08%, representing a
"snapshot" net interest spread of negative 30 basis points. However,
the average net interest spread for the first quarter of 2006 was a
positive 143.8 basis points, as the weighted average yield for the
quarter was 6.540% and the weighted average borrowing cost for the
quarter was 5.098%. The difference between the snapshot net interest
spread and the average net interest spread resulted from the
retrospective adjustment. The weighted average constant prepayment
rate for this portfolio was 29.04% for June 2006. The effective
duration of the portfolio at the end of the second quarter 2006 was
1.42.
"As of June 30, 2006, the Company's REIT operations had 19 master
repurchase agreements with various investment banking firms and other
lenders and outstanding balances of $3.3 billion under 14 of these
agreements," Mr. Zimmer added.
"Although the Board is pleased that the changes in value during
the second quarter of 2006 of the REIT portfolio, the OMSR's and the
retained interests in securitizations were within expectations as
described in the Company's Form 10-Q for Q1 2006, the Board is also
acutely focused on the negative aspects of the net book value
volatility inherent in the OFS OMSR's and retained interests in
securitizations, despite the fact they are non-cash charges. As stated
previously, the Board authorized hedging program for OMSRs and
residuals to commence during the second quarter of 2006. Hedging will
continue to be utilized as a tool to curtail balance sheet volatility
when proper pricing opportunities present themselves.
"During the second quarter, OFS successfully issued its second
2006 securitization. The underlying collateral for the $491.6 million
issuance was loans originated or purchased by OFS, and it was issued
using OFS's securitization shelf Opteum Mortgage Acceptance
Corporation (OPMAC). This deal was smaller in size than recent OPMAC
securitizations because OFS elected to sell $856.4 million of whole
loans during the second quarter of 2006 in order to maximize up front
cash proceeds. These whole loan sales, while providing liquidity,
typically are done at the expense of higher GAAP earnings otherwise
achieved which can be achieved through securitizations. Gain on sale
accounting through securitizations allows the Company the opportunity
to realize non-cash earnings in the form of originated mortgage
servicing rights and retained interests in the securitizations. The
Company will continue to regularly weigh the benefits of all cash
execution via whole loan, servicing released sales versus the non cash
gain on sale alternative.
"OFS residential originations this year through the second quarter
of 2006 were approximately 10% less than in the first two quarters of
2005. Both the retail and the wholesale origination units closed fewer
loans than had been anticipated, although at the same time,
applications continue to be substantially higher than those of the
first two quarters of 2005. The Board is pleased that OFS had July
2006 loan closings of approximately $628.4 million, which exceeded the
Company's expectations."
Mr. Zimmer went on to say, "The competition in mortgage
originations continued throughout the second quarter and now into the
third quarter. But, in addition to the previously announced reductions
in duplicative or underperforming personnel at OFS, which will result
in over $3.5 million in annualized savings, the reduced borrowing
costs the Company announced in the second quarter have now all been
implemented and should save OFS approximately $3.5 million per year in
the future. Finally, we believe that OFS financial results will
benefit on an ongoing basis from the capital markets expertise that
the REIT management team is rigorously applying to the OFS
securitization strategy."
Opteum Inc. will hold a conference call to discuss this press
release today, August 8, 2006, at 4:00 p.m. Eastern time. Investors
will have the opportunity to listen to a live Internet broadcast of
the conference call through the Company's Web site at www.opteum.com
or through www.earnings.com. To listen to the live call, please go to
the Web site at least 15 minutes early to register, download, and
install any necessary audio software. For those who cannot listen to
the live broadcast, an Internet replay will be available shortly after
the call and continue through August 15, 2006.
-0-
*T
Regulation G Reconciliation
*T
REIT taxable net income is calculated according to the
requirements of the Internal Revenue Code rather than GAAP. For the
year ending December 31, 2006, we intend to distribute at least 90% of
our REIT taxable net income in order to retain our tax qualification
status as a REIT. The following table reconciles REIT net income to
REIT taxable net income for the six and three months ended June 30,
2006:
-0-
*T
Six Three
months ended months ended
June 30, June 30,
2006 2006
------------ ------------
GAAP net loss $ (8,776,004) $ (3,688,880)
Plus: GAAP net loss
of taxable REIT subsidiary
included above 15,357,749 11,211,895
------------ ------------
GAAP net income from REIT operations 6,581,745 7,523,015
Add: inter-company interest paid
on loans 4,048,871 2,216,542
Add: estimated book depreciation and
amortization 174,690 87,345
Less: estimated tax depreciation and
amortization (171,826) (85,913)
Phantom share book/tax
differences, net 604,327 266,033
Other book/tax differences, net (44,666) (21,239)
------------ ------------
REIT Taxable Net Income $ 11,193,141 $ 9,985,783
============ ============
*T
We believe that the foregoing reconciliation of our REIT taxable
net income is useful to investors because REIT taxable net income is
directly related to the amount of dividends we are required to
distribute in order to maintain our REIT tax qualification status.
However, because REIT taxable net income is an incomplete measure of
our financial performance and involves differences from net income
computed in accordance with GAAP, our REIT taxable net income should
be considered as supplementary to, and not as a substitute for, our
net income computed in accordance with GAAP as a measure of our
financial performance.
Opteum Inc. is a real estate investment trust that operates an
integrated mortgage-related investment portfolio and mortgage
origination platform. The REIT invests primarily in, but is not
limited to, residential mortgage-related securities issued by the
Federal National Mortgage Association (Fannie Mae), the Federal Home
Loan Mortgage Corporation (Freddie Mac) and the Government National
Mortgage Association (Ginnie Mae). It earns returns on the spread
between the yield on its assets and its costs, including the interest
expense on the funds it borrows. Opteum's mortgage origination
platform, Opteum Financial Services, originates, buys, sells, and
services residential mortgages through 42 offices throughout the
United States and operates as a taxable REIT subsidiary.
Statements herein relating to matters that are not historical
facts are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. The reader is cautioned that
such forward-looking statements are based on information available at
the time and on management's good faith belief with respect to future
events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from those
expressed in such forward-looking statements. Important factors that
could cause such differences are described in Opteum Inc.'s filings
with the Securities and Exchange Commission, including Opteum Inc.'s
most recent Annual Report on Form 10-K or Quarterly Report on Form
10-Q. Opteum Inc. assumes no obligation to update forward-looking
statements to reflect subsequent results, changes in assumptions or
changes in other factors affecting forward-looking statements.