Medical Properties stock (NYSE:MPW) has taken a serious nosedive due to an influx of short sellers who are betting against the possibility of a dividend cut. It’s a risky move that could have significant repercussions but also generate tremendous returns.
Since this narrative has the potential to unfold in either direction, I maintain a neutral stance on the stock.
Why Are Short-Sellers Attacking Medical Properties Stock?
Shares of Medical Properties Trust have attracted a growing short interest, with an increasing number of investors betting against the company’s prospects. Specifically, around 18.4% of the company’s outstanding shares are currently held short, a massive increase from about 5% a year ago, as the company’s worsening financials hint toward a potential dividend cut.
Short interest in the stock had started to accelerate all the way back in April when Hedgeye, an independent investment research and online financial media company, had argued at the time that Medical Properties’ core business is “deteriorating and grossly overvalued in a base case scenario.”
Worries have only grown since, with Medical Properties’ posting underwhelming results through the quarters. And then, last Friday, MPW stock dipped by a notable 5% as Hedgeye reiterated their short call. They stated they believe that the stock is not worth more than $3/share and supported that the dividend payment is “at risk.”
Regarding how the $3/share price target came to be, Hedgeye analyst Rob Simone wrote in a note on Friday, “This calculation includes the impact of cash G&A and capex, but is also generous in that it gives MPW credit for a ~7% return on that incremental capital investment. We believe MPW should reasonably trade several hundred basis points outside of that number, reflecting the inherent risk of its underlying tenant credit.”
Do the Shorts Have a Strong Case?
Medical Properties’ short-sellers seem to have a solid argument, given the company’s uncertain financial reporting and deteriorating financial situation, which could jeopardize the dividend. In particular, as was illustrated in the company’s Q4 and full-year 2022 results, Medical Properties tenants are having a hard time paying their rent in full, with the company being forced to write off roughly $112 million in unbilled Prospect (a tenant) rent during the quarter.
The situation became even more concerning, as Viceroy Research recently highlighted that Medical Properties’ management might have been hiding such issues under the carpet. In fact, Medical Properties appears to have concealed past unbilled rent write-offs and impairments through undisclosed sales of equity investments.
A $2.27 million recovery of unbilled rent in 2021 ended up being a $7.23 million write-off and $39 million impairment offset by a gain on the sale of equity investments. Such reporting raises questions regarding management’s honesty in their reporting.
Adding insult to injury, the Q4 earnings call for Medical Properties was a real nail-biter. During the call, analyst Michael Carroll cut right to the chase and asked the management team if Prospect, the troublesome tenant, had paid any rent during the months of January and February.
It was a tense moment when EVP and CFO Steven Hamner gave a frustrating response, simply saying, “No.” This news is particularly disappointing since it seems that the company’s rent collection woes haven’t improved during the time subsequent to the end of Q4.
The 11.6%-Yielding Dividend Raises Stakes for Short Sellers
Medical Properties’ dividend yield has risen to 11.6% following the stock’s nosedive. It undoubtedly implies that the stock is priced for a dividend cut. At the same time, however, it makes for a costly short position.
Note that when somebody shorts a stock, not only are they not entitled to receive the dividends the underlying company pays, but they must, instead, pay it to the lender of the borrowed shares. Therefore, investors who have chosen to short the stock at the current levels are paying a heavy price to do so.
From the bears’ point of view, as we discussed, there is a strong case to be made supporting a dividend cut. It’s also worth noting that Medical Properties has raised its dividend for nine consecutive years and has traditionally done so in each year’s first quarter. However, this time around, the company did not increase its dividend, keeping stable moving into Q1, which could further signal that the company struggles to keep up with it.
From another point of view, Medical Properties could continue paying its dividend in the coming quarters. After all, the Fiscal 2023 FFO/share guidance, albeit the company’s obscure reporting, supports the current rate of quarterly payouts.
In that scenario, short-sellers may struggle to keep paying such high “interest” to sustain their short positions. This could lead to a short squeeze driven by a buying frenzy in an attempt of bears to cover their shorts, which, in turn, would result in shares skyrocketing.
It’s all really speculative, and the stakes are high on both sides.
What is the Price Target for MPW Stock?
Turning to Wall Street, Medical Properties has a Strong Buy consensus rating based on seven Buys and two Holds assigned in the past three months. At $15.11, the average Medical Properties stock forecast implies a 50.65% upside potential.
The Takeaway
This story is a real nail-biter, as there are strong arguments for both the bears and the bulls. On the one hand, the bears are making a pretty convincing case, but on the other hand, if Medical Properties can keep paying their dividends, the shorts could be in for a rude awakening.
It’s definitely not a time for faint-of-heart investors to jump in, as this could play out both ways. But make no mistake, there’s a lot at stake here, and it’s going to be fascinating to see how it all plays out!
