Opteum Inc. Reports First Quarter 2006 Results
May 08 2006 - 3:35PM
Business Wire
Opteum Inc. ("Opteum") (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 March 31, 2006.
This release should be read in conjunction with the Company's Form
10-Q, which was filed this afternoon with the Securities and
Exchange Commission. For the quarter ended March 31, 2006, Opteum
had REIT net income of $0.9 million, or $0.04 per weighted average
Class A Common Share outstanding. The REIT had estimated taxable
earnings of $1.3 million, or $0.06 per weighted average Class A
Common Share outstanding. The taxable income results includes
payments made by the Company's taxable REIT subsidiary, Opteum
Financial Services (OFS), to the REIT of approximately $1.8 million
of interest on the $65 million loan that the REIT has made to OFS.
That interest is not counted as revenue under generally accepted
accounting principles (GAAP) since it is eliminated in
consolidation of the subsidiary. Yet, that cash can and will be
distributed to shareholders. Opteum Inc., which includes the
results of OFS, recorded a net loss, on a GAAP basis, of
approximately $5.1 million, or ($0.21) per weighted average Class A
Common Share as of March 31, 2006. Included in those consolidated
results are first quarter operating results from OFS, which posted
a GAAP net loss of $6.0 million after tax, or approximately ($0.26)
per weighted average Class A Common Share outstanding for the first
quarter of 2006. This loss was due to two specific accounting
charges. First, the Company chose early adoption of SFAS 156, which
pertains to the valuation of Originated Mortgage Servicing Rights
(OMSR). The Company has elected 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. More importantly, this change will allow the Company to
hedge the OMSRs using the alternate accounting treatment to SFAS
133. Although the initial adoption of SFAS 156, as of January 1,
2006, resulted in an increase in the value of the OMSRs by $4.3
million (pre-tax), which was booked to retained earnings, the March
31, 2006 valuation resulted in a charge in OFS's earnings of $2.5
million (pre tax), or approximately ($0.11) per weighted average
Class A Common Share outstanding. The GAAP net loss at OFS is also
a result of the change in the value of retained interests in
securitizations that OFS has issued from its two private-label
shelves. The change in the value of these residuals flows through
the statement of operations of OFS. The increase in one-month LIBOR
of 44 basis points during the first quarter of 2006 was the primary
reason for the valuation decline and resulting charge of $4.2
million (pre-tax) in the first quarter of 2006. This decline
represents non-cash charges to earnings and is reflective of market
conditions at the time. 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. Accordingly, management has made slight changes to the
assumptions underlying the valuation as part of the implementation
of the Company's hedging strategy in order to align the assumptions
used in its hedge strategy with the valuation methodology. The
change in value of the OMSRs and the change in value of the
residual interests represent approximately $6.7 million (pre-tax)
of the $20.2 million decline in book value for Opteum Inc. from
December 31, 2005 to March 31, 2006. The book value of Opteum Inc.
as of March 31, 2006, was approximately $223.2 million or $9.67 per
Class A Common Share outstanding on that date. Opteum announced an
$0.11 dividend on March 9, 2006, that was paid on April 7, 2006.
That dividend was paid out of a combination of Opteum's REIT
taxable income (as determined by Federal tax regulations) earned in
the first quarter of 2006 and approximately $1.5 million of REIT
taxable income in excess of what it paid out in the form of
dividends in 2005. The dividends were not a return of capital. 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 that 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 six quarters compared
with the Company's 2005 RMBS peer group, as spelled out by the
equity research analysts who cover the sector. Previously, the
Board had determined not to provide earnings guidance for future
periods unless the estimates by the equity analyst community were
clearly out of line with management estimates. As a result of this
policy, the Board has determined that the Company should indeed
provide earnings guidance for the REIT taxable income for the
second quarter of 2006. The Company estimates that approximately
$0.25 to $0.35 will be available to pay dividends from second
quarter taxable earnings from the REIT. This estimate does not
incorporate any second quarter results from OFS. The Board has
authorized management to update the public with this information if
new data makes the estimates fall outside this range. The reason
for the estimated increase in taxable income available for
distribution 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. 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. The
Company's purchase yield accounting assumes that the index rates on
its ARM securities will remain unchanged over the life of the asset
at the time the initial yield is calculated. The substantial
increases in index rates over the previous two years have resulted
in substantial cumulative adjustments to the Company's booked
yields. 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, the
homeowner is not as readily in a position to refinance 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 permanent losses to book
value as a result of portfolio restructuring. Based on the
Company's previous timing of dividend announcements, the Company
expects that the Board of Directors will declare a second quarter
2006 dividend sometime during the first two weeks of June 2006.
Commenting on the results, Jeffrey J. Zimmer, Chairman, President
and Chief Executive Officer, said, "The Opteum Board of Directors
is pleased both to be able to pay favorable dividends for the first
quarter of 2006 and to present expectations of favorable earnings
for the second quarter 2006; but we are eagerly anticipating the
time when the increases in short-term funding rates come to a halt.
The uncertainty of future funding rates, however, means that we
still cannot give any assurances that net interest spreads will not
be compressed further in future quarters." Mr. Zimmer continued:
"As of March 31, 2006, the Company held $3.5 billion of REIT
eligible mortgage-backed securities at fair value. As of March 31,
2006, the weighted average yield on these assets was 4.44% and the
weighted average borrowing cost was 4.54%, representing a
"snapshot" net interest spread of negative 10 basis points.
However, the average net interest spread for the first quarter of
2006 was a positive 34.1 basis points, as the weighted average
yield for the quarter was 4.803% and the weighted average borrowing
cost for the quarter was 4.462%. The weighted average constant
prepayment rate for this portfolio was 24.3% for March 2006. The
effective duration of the portfolio at the end of the first quarter
2006 was 1.59. "As of March 31, 2006, the Company's REIT operations
had 19 master repurchase agreements with various investment banking
firms and other lenders and outstanding balances of $3.4 billion
under 15 of these agreements," Mr. Zimmer added. "The Board is
pleased with the speed at which the successful integration of OFS
is taking place and views the opportunity for diversified sources
of income as a great benefit to all shareholders. Moreover, the
Board anticipates the hedging program for OMSRs and residuals to
commence during the second quarter of 2006 so as to reduce the
volatility of the earnings results at OFS. During the first
quarter, OFS successfully issued its first 2006 securitization in
REMIC form. The underlying collateral for the $934.4 million
issuance was loans originated or purchased by OFS, and it was
issued using OFS's securitization shelf called Opteum Mortgage
Acceptance Corporation (OPMAC). Originations through the first
quarter of 2006 were approximately 8% less than the first quarter
of 2005 and less than OFS management had budgeted for the first
quarter of 2006. Both the retail and the wholesale origination
units closed fewer loans than had been anticipated, while at the
same time, the applications were substantially higher than those of
the first quarter of 2005. We attribute the difference between
closings and applications to be the result of borrowers filing
numerous applications for one loan in an increasingly competitive
environment." Mr. Zimmer went on to say, "The competition in
mortgage originations has continued into the second quarter.
Although the Company does not expect origination levels to remain
below expectations throughout the entire year, we have taken steps
to reduce costs at OFS. In the first quarter of 2006, the Company
reduced non-origination personnel expenses at OFS by over $3.5
million as measured on an annual basis. Additional efficiencies are
in the process of being implemented. In addition, as a taxable REIT
subsidiary of Opteum Inc., OFS has been able to take advantage of
significant reductions in the rate it pays to finance its mortgage
pipeline and owned assets. On an annualized basis, OFS has reduced
borrowing costs by approximately $3.5 million per year. 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
tomorrow, May 9, 2006, at 9:00 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 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 May 16, 2006. Opteum Inc., a
real estate investment trust, which 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 35 offices
throughout the United States and operates as a taxable REIT
subsidiary. This news release contains forward-looking statements
made pursuant to the "safe harbor" provisions of 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 the statements. Important
factors that could cause such differences are described in the
Company's periodic filings with the Securities and Exchange
Commission, including the Company's Registration Statement on Form
S-11. The Company assumes no obligation to update forward-looking
information to reflect subsequent results, changes in assumptions
or changes in other factors affecting forward-looking information.
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