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): February
14, 2007
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
February 14, 2007, Opteum Inc. (the “Company”) issued the press release attached
hereto as Exhibit 99.1 announcing the Company’s consolidated results of
operations for the three and twelve month periods ended December 31,
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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FINANCIAL
STATEMENTS AND EXHIBITS
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(d)
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Exhibits
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Exhibit
No.
99.1
Press
Release of Opteum Inc. dated February 14, 2007
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:
February 14, 2007
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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. dated February 14,
2007
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Exhibit
99.1
[Opteum
Logo]
OPTEUM
INC. REPORTS FOURTH QUARTER 2006 AND
FULL-YEAR
2006 RESULTS
VERO
BEACH, FL (February 14, 2007)—
Opteum
Inc. (NYSE:OPX) (“Opteum” or the “Company”), 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 fourth quarter and year ended December 31, 2006.
Summary
of Results of Operations
For
the
quarter ended December 31, 2006, Opteum reported a consolidated net loss of
approximately $33.9 million, or $(1.38) per Class A Common Share. This includes
a $10.0 million loss attributable to an other than temporary impairment as
of
December 31, 2006, of certain mortgage-backed security (“MBS”) portfolio assets
that we have sold or intend to sell during the first quarter of 2007.
Accumulated Other Comprehensive Loss has been reduced by a corresponding amount
and these MBS assets will be reflected on our balance sheet at fair market
value
as of December 31, 2006. Any difference between the fair market value of
these MBS assets as of December 31, 2006, and the amounts ultimately realized
upon the sale of such MBS assets will be reflected as a gain or loss in our
first quarter 2007 earnings. We currently estimate that our first quarter
2007 earnings will include a loss of approximately $1.1 million related to
the
sale of these MBS assets. For the fourth quarter of 2005, Opteum reported a
consolidated net loss of $2.7 million, or $(0.12) per Class A Common Share.
For
the
year ended December 31, 2006, Opteum reported a consolidated net loss of
approximately $49.5 million, or $(2.02) per Class A Common Share, compared
with
consolidated net income of $24.3 million, or $1.03 per Class A Common Share,
for
the year ended December 31, 2005.
Book
Value per Share
The
Company currently estimates that its Book Value per Share as of
December 31, 2006, was approximately $7.85 compared with $8.41 as of
September 30, 2006. Book Value per Share is regularly used as a valuation metric
by various equity analysts that follow the Company and may be deemed a non-GAAP
financial measure pursuant to Regulation G. The Company computes Book Value
per
Share by dividing total stockholders’ equity by the total number of shares
outstanding of the Company’s Class A Common Stock.
Management
Commentary
Commenting
on the Company’s 2006 fourth quarter and full-year results, Jeffrey J. Zimmer,
Chairman, President and Chief Executive Officer, said, “There is nothing we
dislike more than reporting negative operating results. The Company had one
of
the best records of earnings and dividends among our New York Stock
Exchange-traded peer group during 2004 and 2005, but in 2006 we underperformed
much of the peer group, which was understandably reflected in our stock price.
Challenging business and operating conditions during 2006 resulted in inferior
financial performance in both of our business units. The Company’s investment
portfolio produced losses during the second half of the year as higher borrowing
costs - the result of two years of increases in the Federal Funds Rate - finally
surpassed the gross yield on our portfolio assets. The sale of certain MBS
assets during the first quarter of 2007 is intended to enable the Company to
realize a positive net interest margin profit at a faster pace. The Company’s
taxable REIT subsidiary and mortgage origination platform, Opteum Financial
Services, LLC (“OFS”), has posted losses for four consecutive quarters,
primarily due to four reasons: stiff competition for mortgage loans during
a
period when the number of loans originated declined nationwide, high debt costs,
certain operating inefficiencies and a substantial increase during the fourth
quarter in loan loss reserves due to anticipated increases in early payment
defaults on fourth quarter 2006 originations. Despite the Company’s recent
operating losses, however, we are optimistic about the opportunities that lie
ahead in 2007. Actions have been taken and additional actions are being
evaluated to create a path to profitability in the near future.”
Details
of Results of Operations
The
Company’s fourth quarter consolidated results include net interest expense of
approximately $6.9 million, a $10.0 million loss attributable to an other than
temporary impairment of certain MBS portfolio assets, $2.0 million in losses
on
mortgage banking activities (inclusive of a decrease of $4.9 million in the
fair
value of retained interests in securitizations and hedging gains of $0.6
million), $7.6 million in gross servicing fee income, a $2.8 million gain on
sale of a minority interest in its subsidiary, $2.3 million in other income,
and
an income tax benefit of $11.5 million. The Company’s fourth quarter
consolidated results also include a $10.6 million reduction in fair value of
mortgage servicing rights (comprising a $5.2 million decrease in fair value
and
a $5.4 million decrease in fair value due to run-off), and $28.7 million in
expenses (inclusive of a $7.3 million increase in the Company’s valuation
allowance for loan losses).
The
Company’s full-year 2006 consolidated results include approximately $13.5
million of net interest income, a $10.0 million loss attributable to an other
than temporary impairment of certain MBS portfolio assets, $15.5 million in
gains on mortgage banking activities (inclusive of a decrease of $6.3 million
in
the fair value of retained interests in securitizations and hedging losses
of
$6.2 million), $26.5 million in gross servicing fee income, a $2.8 million
gain
on the sale of a minority interest in its subsidiary, $7.4 million in other
income, and a $27.2 million income tax benefit. The Company’s full-year 2006
consolidated results also include a $34.7 million reduction in fair value of
mortgage servicing rights (comprising a $14.6 million decrease in fair value
and
a $20.1 million decrease in fair value due to run-off), and $97.8 million in
expenses (inclusive of a $13.3 million increase in the Company’s valuation
allowance for loan losses).
Loan
Loss Reserves
The
Company’s total loan loss provision in 2006 was $13.3 million. Of that amount,
$7.3 million was reserved in the fourth quarter of 2006. The actual loan losses
realized in 2006 were $7.5 million, $3.3 million of which were realized during
the fourth quarter of 2006. The additional reserves were due to anticipated
increases in early payment defaults on fourth quarter 2006 originations. As
of
December 31, 2006, the Company’s valuation allowance for loan losses was $8.0
million, compared with $2.2 million as of December 31, 2005.
SOX
Compliance and Audit Related Expenses
Prior
to
November 3, 2005, the Company’s subsidiary, OFS, was a privately held enterprise
and was not subject to Section 404 of the Sarbanes-Oxley Act (“SOX”). During
2006, in addition to the time and value of OFS’s full-time employees, who
collectively spent thousands of hours working on SOX compliance, the Company
paid outside consultants approximately $1.8 million in fees to help guide OFS's
successful SOX compliance efforts. Audit-related fees paid by the Company during
2006 were approximately $1.7 million, which was approximately 16% higher than
the Company’s initial estimates and primarily resulted from work related to the
restatement of the Company’s consolidated financial statements for the periods
ended March 31, 2006, and June 30, 2006.
Liquidity
As
of
today, the Company’s combined cash, short-term receivables (excluding
inter-company loans to OFS) and unencumbered securities total over $92 million,
which is approximately 60% of our market capitalization as of today’s close of
business. Although these assets can be used for many purposes, including
purchasing additional MBS, supporting growing operations at OFS, or as a defense
against unfavorable market changes, the Company presently intends to deploy
future available cash by purchasing additional MBS for its investment
portfolio.
REIT
Taxable Income
For
the
year ended December 31, 2006, the Company currently estimates its REIT taxable
income to be approximately $5.1 million, which includes approximately $3.1
million in capital gains and approximately $10.2 million of interest income
on
inter-company loans to OFS. As discussed below under “Regulation G
Reconciliation,” REIT taxable income is determined in accordance with the
Internal Revenue Code rather than Generally Accepted Accounting Principles
(“GAAP”). Opteum reports REIT taxable income because it is required annually to
distribute as dividends at least 90% of its REIT taxable income to maintain
its
REIT tax qualification status.
Regulation
G Reconciliation
REIT
taxable income is calculated according to the requirements of the Internal
Revenue Code rather than GAAP. During the year ended December 31, 2006, the
Company distributed all of its REIT taxable income in order to retain its tax
qualification status as a REIT. The following table reconciles Opteum’s
consolidated results from operations to the estimated REIT taxable income for
the year ended December 31, 2006:
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Year
Ended December 31, 2006
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(in
millions)
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Consolidated
GAAP net loss
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$ (49.6)
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Plus:
net loss of the taxable REIT subsidiary included above
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32.9
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GAAP
net loss from REIT operations
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(16.7)
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Inter-company
interest paid on loans
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10.2
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Loss
attributable to other than temporary impairment of certain MBS
assets
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10.0
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Book/tax
depreciation and amortization differences
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0.5
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Book/tax
capital gains differences
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0.4
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Equity
Compensation book/tax differences, net
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0.8
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Other
book/tax differences, net
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(0.1)
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Estimated
REIT Taxable Income
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$ 5.1
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The
Company believes the foregoing reconciliation of REIT taxable income is useful
to investors because REIT taxable income is directly related to the amount
of
dividends the Company is required to distribute in order to maintain its REIT
tax qualification status. However, because REIT taxable income is an incomplete
measure of the Company’s financial performance and involves differences from net
income computed in accordance with GAAP, REIT taxable income should be
considered as supplementary to, and not a substitute for, the Company’s net
income computed in accordance with GAAP as a measure of the Company’s financial
performance.
Discussion
of Strategic Actions
The
following is a summary of some of the strategic actions taken to date in an
effort to restore the Company’s profitability and the Company’s strategy for the
remainder of 2007.
Opteum’s
MBS Portfolio
During
2005 and 2006, the portfolio management team at Opteum held the existing MBS
investment portfolio without selling low-yielding assets. If the low-yielding
assets had been sold, the Company would have permanently impaired book value
at
such time. When interest rates increase, as they have for two years, the value
of the Opteum’s portfolio assets generally decline. Valuation declines that are
not other than temporary are recorded on the Company’s consolidated balance
sheet as “Accumulated Other Comprehensive Loss,” representing the cumulative
difference between the historical cost of the Company’s portfolio assets and the
current fair market value of such assets.
As
of
September 30, 2006, Accumulated Other Comprehensive Loss totaled $98.0 million.
As of December 31, 2006, this amount declined to approximately $76.8 million
due
to a net increase during the quarter of approximately $11.3 million in the
value
of Opteum’s investment portfolio and the recognition in current period earnings
of a $10.0 million loss attributable to an other than temporary impairment
of
certain MBS portfolio assets that have been or will be sold in early 2007.
As
the mortgages underlying Opteum’s investment assets are fully paid off, assuming
such assets are all held to maturity, the Accumulated Other Comprehensive Loss
would be reduced to zero and would result in an increase in Book Value per
Share.
Despite
the potential for growth in Book Value per Share, such growth cannot fully
be
realized if the Company’s operating results do not improve. Growth in Book Value
per Share will be reduced by any losses realized at Opteum and OFS. Thus, in
order to maximize the potential growth in Book Value per Share, Opteum’s
portfolio management team has sold or intends to sell MBS portfolio assets
whose
aggregate fair market value at December 31, 2006, was approximately $446
million. The proceeds of these sales have been or will be reinvested in higher
yielding assets. In accordance with applicable accounting standards, the Company
has recorded an other than temporary impairment as of December 31, 2006, of
$10.0 million associated with the MBS portfolio assets sold or intended to
be
sold and this amount is reflected as a loss in the Company’s fourth quarter and
full-year 2006 consolidated results of operations. For REIT tax purposes, the
sale of these MBS portfolio assets will be recognized in 2007. At this time,
the
Company does not currently plan to implement any further sales of MBS portfolio
assets. Additionally, beginning in December 2006, Opteum began reinvesting
the
monthly pay downs of mortgage loans underlying its portfolio assets. Monthly
pay
downs averaged $111 million per month in 2006 with a range of $90 million to
$145 million per month.
Opteum’s
management believes the reinvestment of a small portion of its investment
portfolio into higher-yielding assets, along with reinvesting pay downs on
a
monthly basis, will reestablish a positive net interest margin for its MBS
portfolio by the third quarter of 2007. If this can be achieved, the Company
will be able to mitigate any other operating losses and will be better
positioned to pay a more substantial dividend than that of recent
quarters.
As
of
December 31, 2006, Opteum’s MBS portfolio had a fair value of $2.8 billion.
Also, as of December 31, 2006, the weighted average yield on these assets was
4.77% and the weighted average borrowing cost was 5.31%, representing a
"snapshot" negative net interest margin of 54 basis points. The weighted average
constant prepayment rate for this portfolio was 25.12% for December 2006. The
effective duration of the portfolio at the end of the fourth quarter was 1.023.
As of December 31, 2006, Opteum had 19 master repurchase agreements with various
investment banking firms and other lenders with an aggregate repurchase
obligations of $2.7 billion under 10 of these agreements.
Opteum
Financial Services
During
the fourth quarter of 2006, OFS originated or purchased $1.6 billion in
mortgages, compared with $1.59 billion originated or purchased during the fourth
quarter of 2005. For the full-year 2006, OFS originated or purchased $6.31
billion in mortgages, which was down 2.8% from the $6.49 billion originated
or
purchased in 2005. However, the nearly flat levels for 2006 versus 2005 are
differentiated by the 21.0% year-over-year decline in the higher-margin OFS
retail business versus the 13.0% increase in the lower-margin OFS conduit
business. Year-over-year wholesale originations and purchases were up 0.2%.
Actual
margins associated with sales of mortgage loans at OFS during 2006 were less
on
average during the year than had been anticipated due largely to stiff
competition in the marketplace for mortgage originations. The difference in
actual margin represents the largest component of operating losses incurred
in
2006. Exacerbating these lower-than-expected loan sale margins was an increase
in loan loss reserves as a result of increases in early payment defaults on
fourth quarter 2006 originations, a decline in value of OFS’s retained interests
in securitizations, and net losses on hedge transactions related to both
mortgage servicing rights and the retained interests.
In
response to these results and to the secular development of brokerage firms
acquiring mortgage lenders that are then provided with significantly lower
funding costs, the Company’s management team worked closely with key lenders to
improve asset funding rates and initial margin rates. In late December 2006,
the
Company announced the sale to Citigroup Global Markets Realty Corp. (“Citigroup
Realty”) of a 7.5% non-voting Class B limited liability company membership
interest in OFS and amendments to OFS’s financing facilities with Citigroup
Realty that the Company currently believes, based on 2007 projected production
levels, will lead to approximately $5.5 million to $6 million in savings at
OFS.
Over
the
course of 2006, the Company carefully reviewed all positions at OFS in order
to
assess the criticalness of each job position to OFS’s operations. This resulted
in the elimination of 272 positions at OFS. However, OFS’s expansion into
northern Florida, the Midwest and San Diego resulted in the addition of 78
new
sales or sales-support personnel. As of December 31, 2006, OFS employed 882
associates, which is a net reduction of 194 positions from December 31,
2005. The combined savings from staff reductions and new lending agreements
should result in significantly leaner operations at OFS in 2007 than in the
past.
The
expected recovery in the Company’s Book Value per Share discussed above will not
be fully realized if OFS’s results do not improve. However, the OFS management
team believes the combination of its new funding terms, cost savings associated
with its reduction in staff, and access to Citigroup Realty’s capital markets
expertise will lead to breakeven or positive monthly results at OFS by
mid-2007.
-MORE-
Closing
Remarks
“Over
the
course of the last 45 days, a number of sub-prime mortgage originators have
announced significant increases in loan loss provisions, with a few even ceasing
operations," Zimmer added. "The hugely negative implication for earnings among
most of these companies has led to a full scale rout of their stock prices
-
some declining as much as 45% in the last two months. In contrast, OFS has
limited exposure to the sub-prime market with sub-prime originations
representing only 4.3% of OFS’s 2006 mortgage production volume. Unfortunately,
it appears that the recent decline in the stock prices of sub-prime lenders
has
had an impact on the stock prices of prime and Alt-A lenders as well, as
described by the many equity analysts who have released research reports on
mortgage lenders over the last two weeks.
“Separately,
over the last few months, investors have inquired whether the Company has been
repurchasing stock, given that it has been trading at close to a 15% discount
to
Book Value per Share. The Board authorized a stock buyback program in 2005
that
was limited to one year in duration, and the authorization has expired. As
a
small-cap company, Opteum prizes its liquidity and its ability to support growth
and future profitability. Shrinking the Company’s capital beyond the original
stock buyback program would hinder the Company's ability to invest and to grow,
and is not deemed to be in the long-term best interest of all
shareholders.
“The
Board of Directors and our senior management team believe that the
implementation of recent operating changes will lead to positive operating
results during 2007. I look forward to making that promise a reality so all
of
our shareholders can realize a positive return on their investment,” Zimmer
concluded.
Opteum
will hold a conference call to discuss this press release tomorrow, February
15,
2007, at 10:30 a.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.
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 February 22, 2007.
About
Opteum
Opteum
Inc. is a real estate investment trust (“REIT”) 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 attempts to earn 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
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