Community Healthcare Trust (NYSE: CHCT) currently offers a dividend yield above 10%. That puts it several times higher than the S&P 500's dividend yield of less than 1.5%. That's a monster yield for a company with such a magnificent record of increasing its payout. It has raised its payment every quarter since its initial public offering in 2015.

However, that streak could end abruptly. The healthcare-focused real estate investment trust (REIT) revealed last quarter that one of its hospital tenants is experiencing some challenges and might be unable to pay rent. That's eerily similar to what happened to fellow healthcare REIT Medical Properties Trust (NYSE: MPW). Its peer's tenant troubles caused it to cut its dividend twice over the past year.

Diagnosing the issue

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

The issue caused 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 earned enough money to cover its dividend, which it raised to $0.4625 per share last quarter. However, its 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 their adjusted FFO (50%-75%), which is a proxy of their actual free cash flow. With its payout level rising, Community Healthcare Trust has less breathing room and isn't retaining much cash to fund new investments, which could put additional pressure on its balance sheet.

We've seen this story before

Community Healthcare Trust isn't the only healthcare REIT that has experienced a tenant issue. Medical Properties Trust had two major tenants experience financial distress in recent years, which affected their ability to pay rent. Its former top tenant, Steward Health Care, went bankrupt. The REIT's issues with those tenants caused it to cut its dividend twice over the past year. It has also had to sell other hospital properties to prop up its balance sheet. On a positive note, Medical Properties Trust was finally able to exit its relationship with Steward, allowing it to lease several of its properties to new tenants.

Community Healthcare 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 it had with the company were assumed or assigned to buyers as part of the bankruptcy process, while two others remained with the surviving entity.

Ideally, the REIT will see a similarly positive outcome with its geriatric inpatient behavior hospital tenant. However, it could take some time for that company to work through its issues, which could weigh on Community Healthcare's results in the coming quarters.

In the meantime, the REIT is working to continue expanding and diversifying its portfolio to further enhance and stabilize its cash flow. It acquired one inpatient rehabilitation facility for $23.5 million in the second quarter and subsequently closed 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 didn't have, which enhances its ability to continue making acquisitions while it works through its tenant troubles.

A high-risk, high-yielding REIT

Community Healthcare Trust has done a magnificent job growing its dividend since it came public. However, tenant troubles could jeopardize its dividend growth streak, especially since it has a high dividend payout ratio. While the REIT does have a conservative balance sheet, which allows it to continue making acquisitions, it might face the same fate as Medical Properties Trust and need to reduce its dividend if its tenant troubles persist. It's too high of a risk for most income-seeking investors right now despite its alluring yield.

Should you invest $1,000 in Community Healthcare Trust right now?

Before you buy stock in Community Healthcare Trust, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Community Healthcare Trust wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $728,325!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Matt DiLallo has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Is This 10%-Yielding Dividend Stock's Magnificent Growth Streak About to Come to an Abrupt End? was originally published by The Motley Fool