Is this 10% dividend growth streak coming to an abrupt end?

Community Healthcare Trust (CHCT -1.10%) It currently offers a dividend yield of over 10%. That puts several times higher than the S&P 500‘s Dividend yield of less than 1.5%. It’s a monster performance for a company with such a magnificent growth record his payment It has increased its payout every quarter since its initial public offering in 2015.

However, that streak could come to an abrupt end. The healthcare-focused real estate investment trust (REIT) revealed last quarter that one of its hospital tenants had some challenges and might be unable to pay the rent. It is strangely similar to what happened to his companions Healthcare REITs Medical Properties Trust (MPW 0.09%). The problems of the tenants of his pair caused it it has cut its dividend twice in the past year.

Diagnose the problem

Last quarter, Community Healthcare Trust determined that it may be unable to collect certain rent and interest payments from a geriatric tenant of the inpatient behavioral hospital. The tenant, who has six leases with the REIT, it is opposite challenges with patient levels and employee staffing. That affects their cash flow and the consistency of their rent and interest payments. As a result, the REIT recorded a reserve, which reduced its adjusted funds from operations (FFO) from $0.12 per share.

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

Community Healthcare Trust also made enough cash to cover its dividend, which rose to $0.4625 per share last quarter. However, it is 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 comply with IRS regulations, they tend to aim for a more conservative level of their adjusted FFO (50%-75%). which is a proxy of its actual. free cash flow. With its level of payment rising, Community Healthcare Trust has less breathing space and does not retain much cash to fund new investments, which could put additional pressure on its balance sheet.

We’ve seen this story before

Community Healthcare Trust he is not alone health care REIT what you do has he had a tenant problem. Medical Properties Trust has had two major tenants that have experienced financial distress in recent years, which has affected their ability to pay rent. Its previous tenant, Steward Health Care, went bankrupt. The REIT’s problems with those tenants have caused 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 been able to out of her relationship with Stewardwhich allows them to rent many of their properties to new tenants.

Community Health Care recently went through something similar with another tenant. In February, one of its tenants, GenesisCare, emerged from bankruptcy. That event ended positively for the REIT. Five of the seven leases he had with the company were assumed or assigned to buyers as part of the bankruptcy process, while two others remain with the surviving entity.

Ideally, the REIT will see a similar positive outcome with its geriatric hospital tenant. However, I could take it some time for that company to work on its problems, which could weigh on the results of Community Health in the next quarters.

Meanwhile, the REIT is working to continue expanding and diversifying its portfolio to strengthen 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 increases its ability to continue to make purchases while working through their tenant problems.

A high risk, high yield REIT

Community Healthcare Trust has done a magnificent job growing its dividend since going public. However, tenant issues could jeopardize its dividend growth streak, especially since it has a high dividend payout ratio. While the REIT has a conservative balance sheet, which allows it to continue making acquisitions, it could face the same fate as Medical Properties Trust and need to reduce its dividend if its tenant problems persist. It is too high risk for most investors looking for income now despite its attractive performance.