Is this streak of 10% yielding dividend stocks about to come to an abrupt end?

Community Healthcare Trust (CHCT -1.83%) currently offers a dividend yield of over 10%. That puts it several times higher than S&P 500his dividend yield less than 1.5%. This is a monster return for a company with such a magnificent growth record its payment. It has raised its payout every quarter since its 2015 initial public offering.

However, that streak could come to an abrupt end. Healthcare-Focused Real Estate Investment Trust (REIT) disclosed last quarter that one of its hospital tenants is experiencing some challenges and may not be able to pay its rent. It’s eerily similar to what happened to a colleague Healthcare REIT Medical Property Trust (MPW 2.16%). The troubles of his fellow tenants provoked it has cut its dividend twice in the past year.

Diagnosing the problem

Last quarter, the Community Healthcare Trust determined that it may not be able to collect certain rental and interest payments from a Geriatrics behavioral hospital tenant. The tenant, which has six leases with the REIT, is facing patient level and staffing challenges. This affects his cash flow and the consistency of his rent and interest payments. As a result, the REIT recorded a provision, which reduced its adjusted funds from operations (FFO) by $0.12 per share.

The issue led the REIT to report $0.53 of adjusted FFO in the quarter. That was down from $0.59 per share in the first quarter.

Community Healthcare Trust still made enough money to cover its dividend, which it raised to $0.4625 per share last quarter. However, she dividend payout ratio increased from 78% to 87%, which is high for a REIT. While REITs must pay out at least 90% of their taxable earnings in dividends to remain in compliance with IRS regulations, they tend to target a more conservative level of adjusted FFO (50%-75%), which is a their real proxy. free cash flow. With the level of payments rising, the Community Healthcare Trust has less breathing room and is not retaining much cash to fund new investment, which could put further pressure on its balance sheet.

I’ve seen this story before

Community Healthcare Trust he is not the only one health REIT that has had a problem with the tenant. Medical Properties Trust has had two major tenants that have experienced financial difficulties in recent years, which has affected their ability to pay rent. Its former tenant, Steward Health Care, filed for bankruptcy. The REIT’s problems with these tenants have led it to cut its dividend twice in the past year. It also had to sell other hospital properties to shore up its balance sheet. On a positive note, Medical Properties Trust has finally succeeded leave the relationship with Stewardallowing him to rent out some of his properties to new tenants.

Community Healthcare recently went through something similar with another tenant. In February, one of its tenants, GenesisCare, emerged from bankruptcy. This event ended positively for the REIT. Five of the seven leases it had with the company were assumed or assigned to buyers in the bankruptcy process, while two others remained with the surviving entity.

Ideally, the REIT will see a similarly positive outcome with its geriatric behavior hospital tenant. However, it could take a while some it’s time for that company to fix its issues, which could hurt Community Healthcare’s results in the coming quarters.

In the meantime, the REIT is working to continue expanding and diversifying its portfolio to increase further and stabilize its cash flow. It acquired an inpatient rehabilitation facility for $23.5 million in the second quarter and later closed on the purchase of a medical office building for $6.3 million. It had seven other properties under contract, valued at $169.5 million, with those deals expected to close in phases through 2027. Meanwhile, it has a conservative balance sheet, something Medical Properties Trust did not have, which boosts its capacity to continue purchases while going through tenant woes.

A high-risk, high-return REIT

Community Healthcare Trust has done a magnificent job of increasing its dividend since going public. However, tenant issues could put its dividend growth streak in jeopardy, especially since it has a high dividend payout ratio. While the REIT has a conservative balance sheet that allows it to continue making acquisitions, it could face the same fate as Medical Properties Trust and have to cut its dividend if tenant problems persist. It’s too much risk for most investors looking for income right now, despite its attractive yield.