The increases aren’t large – a quarter of a penny each time. While they have contributed to the current 13% annual yield, the big reason the stock has such a high yield is that the share price has fallen by two-thirds over the past three years.

Community Healthcare Trust owns 200 properties in 36 states that are leased to doctors, hospitals, and other healthcare organizations.

This is a small cap company that generates a little over $100 million in revenue per year. Despite the weak stock price, the company is profitable and cash flow positive.

Let’s see whether its cash flow is enough to sustain further quarterly raises.

Because Community Healthcare Trust is a real estate investment trust, we use a measure of cash flow called funds from operations, or FFO.

Last year, FFO climbed 7% to $51.2 million. This year, it is forecast to slip slightly to $50.9 million. That projected slight reduction in FFO is enough to earn Community Healthcare a penalty on its Safety Net rating.

Negative cash flow growth is a big red flag.

Since the difference between last year’s total and the current estimate for this year is so small, it is possible the company reports positive FFO growth instead of slightly negative. If that occurs, Community Healthcare will earn an upgrade to its Safety Net rating.

Another area of concern is the payout ratio. Again, the difference between a penalty and no penalty is very small.

Last year, Community Healthcare paid shareholders $51.7 million in dividends against $51.2 million in FFO, so it paid more in dividends than it took in (but barely). This year, the gap is anticipated to widen a bit – to $53.5 million in dividends paid against $50.9 million in FFO.

That would push the payout ratio up from 101% to 105%, still just above my 100% threshold for REITs.

Over the first three quarters of 2025, FFO has totaled just $32.6 million, so the company would need a big fourth quarter to eclipse the current full-year estimate and cover the dividend.

As you can see, this is a dividend story with some problems. FFO has been declining, it’s projected to decline again this year, and the company pays out more in dividends than it takes in.

Though it only needs to beat FFO expectations by $300,000, that doesn’t seem likely given that FFO over the first nine months is pretty far away from that number and rental real estate is a somewhat predictable business due to rents being locked in.

On the plus side, the company has a stellar track record of quarterly dividend increases, and I expect management to do everything in their power to keep that 41-quarter streak alive.

I don’t expect an imminent dividend cut, and if FFO improves, the company’s dividend safety rating could even receive an upgrade or two. But if FFO doesn’t improve, management will have some tough decisions to make.

Dividend Rating Safety: D

What stock’s dividend safety would you like me to analyze next? Leave the ticker in the comments section.

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Also, keep in mind that Safety Net can analyze only individual stocks, not exchange-traded funds, mutual funds, or closed-end funds.

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Can REITs hold up in the face of higher rates? After all, higher rates raise their borrowing costs, and REITs borrow a lot of money in order to buy properties.

I believe REITS will be just fine. In fact, better than fine.

Many REITs have pricing power as inflation rises – meaning they can increase their prices along with inflation. For example, student housing REITs have a captive audience. For many students, there aren’t tons of options for where to live, especially if they want to be close to school.

Perhaps most importantly, the evidence doesn’t show that REITs act poorly when interest rates are climbing. Interestingly, they perform right in line with the S&P 500 ahead of interest rate hikes, when people are concerned about the effect of higher rates.

But once the rate hikes hit, REITs actually do quite well.

It’s a classic Wall Street reaction. Investors worry about some negative catalyst, and then when the catalyst actually hits, stocks rally. It’s like how stocks often run higher right after a war starts.

Looking at the interest rate hikes going back to 1994, we can see that REITs outperformed the S&P 500 in the following six months three out of four times. The average outperformance was 3.9%. That number would likely be higher if not for 1999, which led into the top of the dot-com bubble when investors were way more interested in buying tech stocks with no revenue instead of dividend-producing REITs. During that period, REITs underperformed by 17.7%.

The other periods, starting in 1994, 2004 and 2015, saw REITs outperform the broad market by 7.9%, 18.2% and 7.0%, respectively, for an average of 11%.

Which REITs should you focus on?

I previously mentioned student housing. I believe that’s a great sector to be in. Along with student housing, self-storage and industrials are expected to have the most funds from operations (FFO) growth over the coming years. FFO is a form of cash flow used by REITs.

I’m also a fan of healthcare REITs, as demand for healthcare is only going to increase. It’s important to keep in mind that healthcare REITs do not operate healthcare facilities, like hospitals and nursing homes. They’re simply the landlords of those institutions.

Here are some examples of stocks in each REIT sector that I just mentioned, along with their current dividend yields.

REITs belong in a diversified income portfolio, regardless of interest rates. As rates start to rise, you may hear chatter that exposure to interest rate-sensitive stocks like REITs should be reduced.

But the data does not show that. In fact, it shows just the opposite. If you don’t already own REITs, start exploring some and consider adding them to your portfolio in the near future.

Good investing,

Marc

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