Medical Properties Trust (MPW -0.22%) has had plenty of bad news over the last year. Interest rates soared. A major tenant reorganized under a Chapter 11 bankruptcy process. Another big tenant hasn't been able to fully pay its rent so far this year.
Shares of the healthcare real estate investment trust (REIT) have plunged more than 60% over the last 12 months. But could a short squeeze be on the way for Medical Properties Trust?
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The necessary ingredients
A short squeeze basically requires two ingredients. First, a stock must have a high short interest. Second, it must have one or more positive catalysts that cause short-sellers to scramble to cover their positions. When that happens, it can ignite a chain reaction with other short-sellers buying shares to cover their positions. This quickly drives the stock higher and higher.
Medical Properties Trust has the first ingredient covered. The short percentage of shares outstanding stood at 20.38% as of March 15, 2023. The short percentage of float (shares that are available for trading) was even higher at 28.88%.
The company also recently had a positive catalyst. Shares of Medical Properties Trust jumped earlier this week on reports that the REIT is selling 11 hospitals in Australia to HMC Capital for 1.2 billion Australian dollars, which amounts to around $818 million in U.S. currency. Medical Properties Trust plans to use the proceeds to pay off its term loan used to acquire the hospitals in 2019 earlier than the 2024 maturity date.
Don't jump the gun
It's too early to declare that a short squeeze is imminent. Sure, Medical Properties Trust wrapped up the week with a nice gain. That's certainly an improvement from the general trend over the last month or so. However, this momentum must pick up considerably going into next week for a short squeeze to materialize.
There could be more good news on the way, though. Prospect Medical, the aforementioned tenant that hasn't been able to pay all of its rent so far this year, should be on track to close on the sale of its New Haven, Connecticut, facility by mid-2023. It's possible that this transaction could enable Medical Properties Trust to at least receive some rent payments from Prospect for its other facilities leased to the beleaguered hospital operator.
Indeed, Medical Properties Trust CFO Steven Hamner said in the company's latest quarterly update that the most likely outcome is that it will receive most of the rent this year from Prospect's California and Connecticut facilities. The company doesn't expect to recover anything in 2023 from its Pennsylvania investment.
Things for investors to like
Positive signs that Medical Properties Trust will have sufficient funds from operations to keep its dividend at current levels and further reduce its leverage will make investors happy. If the short interest remains really high, it's possible that a short squeeze could happen.
I don't think that investors should presume that a short squeeze is on the way. However, there are other things to like about the beaten-down stock.
The obvious big plus is Medical Properties Trust's ultra-high dividend yield of over 14%. I'm cautiously optimistic that the REIT won't have to cut its dividend.
It also appears that the worst could be over for the company. The financial outlook for hospital operators is improving. Prospect is making headway in its efforts to sell assets to raise cash. Interest rates seem likely to soon stabilize.
Short-sellers are betting that the picture for Medical Properties Trust will deteriorate. That might turn out to be an unwise wager.
