Real estate investment trust Invesco is changing its business strategy after a weaker-than-hoped-for 2013. So what happened and how is Invesco reacting?
In 2013, the investor in Ginnie Mae, Fannie Mae and Freddie Mac bonds earned only $143 million.
That's down nearly 60% from 2012, when the net income equaled $344 million. In 2011, the REIT earned $286 million.
There were two reasons for the fall in performance, according to its year-end performance statement filed with the Securities & Exchange Commission.
1. Interest rate rises
"While we use hedging strategies in an attempt to reduce interest rate exposure, the sharp increase in interest rates caused a net reduction in our book value. Investors responded to these declines in book value and we saw the value of our stock price decline the second half of 2013."
2. The Fed Taper
"With the Federal Reserve’s decision to taper, we increased our efforts to lower the interest rate sensitivity of our portfolio. One of the steps that we took was to sell fixed-rate Agency RMBS, which led us to record a loss on sale of assets in the third and fourth quarters of 2013. The total losses in those quarters were greater than the earnings from our portfolio and as such we recorded a net loss for those periods."
The company said that it expected credit to improve to homeowners and that the private-label securitization market would return in greater strength in 2013. This didn't happen as much as expected, the filing indicates. Nonetheless, the REIT believes in the strength of the U.S. housing recovery.
Here's where it believes it will reverse its fortunes:
"We expect to pursue opportunities to increase the percentage of our equity invested in three areas during 2014: commercial mortgage loans, subordinate interests in residential loan securitizations and GSE risk-sharing transactions."