It's not hard to understand why many investors are skeptical about Medical Properties Trust (MPW -1.10%). Several of the real estate investment trust's (REIT) major tenants have faced financial challenges recently. One of them is behind on its rent payments this year. And interest rates have risen significantly since the start of 2022, making it more expensive for Medical Properties Trust to refinance its debt.

Some are so skeptical that they've bet against the stock. As of April 14, a whopping 27% of Medical Properties Trust's float was sold short. 

Such bets have paid off so far this year. The healthcare REIT's share price had fallen nearly 30% as of the market close on Wednesday. But Medical Properties Trust just gave short-sellers something to worry about.

Short-sellers' biggest fear

Short-sellers open their positions by borrowing shares from another investor, then selling them. The hope is that the stock price will fall, which would pave the way for them to buy shares back at a lower level. The short-seller could then return the repurchased shares to the investor they borrowed them from originally and pocket the price difference. Of course, no investor will lend shares for free, so short-sellers must also pay interest.

Short-sellers want nothing but bad news for a company they've bet against. They dread when any positive developments occur. Such good news can lead to the short-sellers' biggest fear: a stock they've sold short rising significantly.

On Thursday, Medical Properties Trust gave short-sellers some reason to sweat. Its share price rose by as much as 8.8% in the first few hours of trading after the company announced its first-quarter results.

Granted, we haven't seen any clear indication so far that a short squeeze on the stock is occurring. Short squeezes happen when some short-sellers get so jittery that they buy back the shares they've borrowed so that they can close out their positions and cut their losses. These purchases trigger a vicious cycle, pushing prices higher and inducing additional short-sellers to cover their positions, which drives the stock up even more. 

Medical Properties Trust's good news

On the surface, Medical Properties Trust's Q1 results might not have looked all that great. The REIT's net income plunged to $33 million, or $0.05 per diluted share, from $632 million, or $1.05 per diluted share, in the prior-year period. Normalized funds from operations (NFFO) fell to $222 million, or $0.37 per diluted share, in Q1 from $282 million, or $0.47 per diluted share, in the prior-year period.

Medical Properties Trust also lowered its 2023 outlook. The company now expects its earnings per share for the year will be between $0.06 and $0.17 compared to its previous guidance range of $0.83 to $0.98. It projects NFFO of between $1.50 and $1.61. The previous upper end of its NFFO guidance range was $1.65.

However, investors weren't rattled by the guidance revisions. They knew that Medical Properties Trust's sale of its Australian properties would have an impact. They also understood that the transaction reduced the REIT's leverage significantly.

The good news was that Medical Properties Trust met analysts' NFFO estimates. Importantly, the company was able to easily cover its dividend. It declared a regular quarterly dividend of $0.29 per share -- the same amount it has distributed in each of the last five quarters -- to be paid on July 13.

Also, Medical Properties Trust has reason to be optimistic about recovering money from Prospect Medical, which is behind on its rent payments this year. After the end of the first quarter, a third-party lender agreed to provide financing to Prospect with a binding commitment. This transaction should significantly boost the troubled hospital operator's liquidity.

Short-sellers should be concerned

It's too soon to say that Medical Properties Trust is out of the woods. More of its tenants could start falling behind on their rent payments. 

But the hospital REIT is giving short-sellers exactly what they don't want right now -- good news and a rising share price. Medical Properties Trust remains profitable. Recent transactions show that it hasn't overpaid for properties. The company doesn't have any debt maturing until 2025. And its dividends continue to flow without any cuts in sight.

That should be enough to concern short-sellers. And if enough of them begin to worry, a short squeeze just might be on the way.