What happened

Shares of Senior Housing Properties Trust (DHC 0.96%), a real estate investment trust (REIT), are getting beaten down in response to a new deal with the company's largest tenant, Five Star Senior Living (FVE). Investors upset with plans to modify arrangements with the troubled operator have driven the stock 17.6% lower as of 12:08 p.m. EDT on Tuesday.

So what 

Earlier this year, Senior Housing warned us that Five Star was about to go belly up. That's a problem, because properties leased to Five Star, plus others that are managed by Five Star, were responsible for 84% of total net operating income (NOI) reported by Senior Housing last year. 

Guy in a suit drawing a downward sloping chart.

Image source: Getty Images.

Today we learned that Senior Housing is terminating all leases and management agreements with Five Star and replacing them with new management agreements for all 261 Five Star-operated senior living communities. In order to make up for the expected losses, Senior Housing plans on cutting its annual dividend payout from $1.56 per share to somewhere between $0.55 and $0.65 per share.

Investors would probably prefer it if Senior Housing transitioned those properties, but Medicare and Medicaid budget cuts that are hurting Five Star make it awfully tough to find an operator willing to take similar risks.

Now what

Senior Housing tried to smooth over slashing its dividend by telling shareholders about its new ownership stake in Five Star. Senior Housing shareholders will receive rights to shares equal to 51% ownership of Five Star.

This REIT was in the middle of expanding its reach to include medical office buildings, but diversification hasn't happened quickly enough. With far less income, Senior Housing needs to sell up to $900 million worth of properties this year in order to lower debt to a manageable level.

Despite the stock's tumble, the midpoint of the proposed dividend offers a measly 6.1% yield that isn't worth the risk.