Falling Interest Rates Take a Bite Out of Two Harbors' Earnings

Hybrid mortgage real estate investment trust (REIT) company Two Harbors Investment Corp. (NYSE: TWO) reported fourth-quarter (non-GAAP) core earnings last week of $0.25 a share, which was well below the quarterly dividend of $0.40 a share it paid out. The company also reported a drop in book value per share from $14.72 at the end of the third quarter to $14.54. Falling interest rates increased prepayment speeds, which effectively lowers interest income going forward.

Two Harbors is a mortgage REIT, where much of its return to stock market investors is based on the dividend, so keeping a close eye on dividend coverage is critical. REITs have to pay out at least 90% of earnings for favorable tax treatment, which means there often isn't a lot of cushion. Whenever a REIT reports earnings below (or in this case substantially below) the dividend it is a potential red flag for a dividend cut.

So, is Two Harbors in danger of cutting the dividend? Let's take a closer look. 

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Source Fool.com