SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
Form
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of
Report (Date of earliest event reported): August
8, 2006
Opteum
Inc.
(Exact
Name of Registrant as Specified in Charter)
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Maryland
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001-32171
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72-1571637
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(State
or Other Jurisdiction of Incorporation)
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(Commission
File Number)
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(IRS
Employer Identification No.)
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3305
Flamingo Drive, Vero Beach, Florida 32963
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code
(772) 231-1400
N/A
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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¨
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
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¨
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
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RESULTS
OF OPERATIONS AND FINANCIAL
CONDITION
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On
August
8, 2006, Opteum Inc. (the “Company”) issued the press release attached hereto as
Exhibit 99.1 announcing the Company’s earnings for the period ended June 30,
2006.
The
information furnished under this “Item 2.02 Results of Operations and Financial
Condition,” including the exhibit related hereto, shall not be deemed “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall
it
be deemed incorporated by reference in any disclosure document of the Company,
except as shall be expressly set forth by specific reference in such
document.
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ITEM
9.01.
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EXHIBITS
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(d)
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Exhibits
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99.1
-
Press Release of Opteum Inc.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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Date:
August 8, 2006
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OPTEUM
INC.
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By:
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/s/
Jeffrey J. Zimmer
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Jeffrey
J. Zimmer
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Chairman,
Chief Executive Officer and
President
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Exhibit
No.
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99.1
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-
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Press
Release of Opteum
Inc.
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Exhibit
99.1
OPTEUM
INC. REPORTS SECOND QUARTER 2006 RESULTS
VERO
BEACH, FL (August 8, 2006)—
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 $3.5 million per year
in
the future. Finally, we believe that OFS financial results will benefit on
an
ongoing basis from the capital markets expertise that the REIT management team
is rigorously applying to the OFS securitization strategy.”
Opteum
Inc. will hold a conference call to discuss this press release today, August
8,
2006, at 4:00 p.m. Eastern time. Investors will have the opportunity to listen
to a live Internet broadcast of the conference call through the Company's Web
site at www.opteum.com
or
through www.earnings.com.
To
listen to the live call, please go to the Web site at least 15 minutes early
to
register, download, and install any necessary audio software. For those who
cannot listen to the live broadcast, an Internet replay will be available
shortly after the call and continue through August 15, 2006.
Regulation
G Reconciliation
REIT
taxable net income is calculated according to the requirements of the Internal
Revenue Code rather than GAAP. For the year ending December 31, 2006, we intend
to distribute at least 90% of our REIT taxable net income in order to retain
our
tax qualification status as a REIT. The following table reconciles REIT net
income to REIT taxable net income for the six and three months ended June 30,
2006:
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Six
months
ended
June
30, 2006
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Three
months ended
June
30, 2006
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GAAP
net loss
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$
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(8,776,004)
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$
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(3,688,880)
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Plus:
GAAP net loss of taxable REIT subsidiary
included
above
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15,357,749
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11,211,895
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GAAP
net income from REIT operations
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6,581,745
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7,523,015
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Add:
inter-company interest paid on loans
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4,048,871
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2,216,542
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Add:
estimated book depreciation and amortization
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174,690
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87,345
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Less:
estimated tax depreciation and amortization
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(171,826)
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(85,913)
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Phantom
share book/tax differences, net
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604,327
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266,033
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Other
book/tax differences, net
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(44,666)
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(21,239)
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REIT
Taxable Net Income
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$
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11,193,141
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$
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9,985,783
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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.
Contact: Robert
E.
Cauley
Chief
Financial Officer
772-231-1400
www.opteum.com