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Prison REITs Rise After Analysts Call U.S. Plan a Minor Blow (2)

Saturday, 20 Aug 2016 12:06 PM

(Bloomberg) -- Companies that operate private prisons began to recover from Thursday’s historic plunge as analysts said the U.S. Justice Department’s plan to phase out federal contracts with the operators would affect only a small part of their business.

Corrections Corp. of America, a real estate investment trust that is the nation’s largest operator of private prisons, rose 13 percent to $19.78 at 2:16 p.m. New York time, after tumbling 35 percent in its biggest drop since its 1997 initial public offering. GEO Group Inc., a REIT that operates prisons, halfway houses and related facilities, gained 21 percent to $23.69, after falling 40 percent in the biggest decline in its 22 years as a publicly traded company.

“The massive falloffs in the stocks imply that the risk will spread to other federal, state and local jurisdictions,” Ryan Meliker, an analyst at Canaccord Genuity, wrote in a note to clients Thursday. “While this is possible, we believe it is unlikely.” The stock plunges, he said, were “more based on fear than actual cash-flow risk.”

Corrections Corp. and GEO Group grew as the Federal Bureau of Prisons began to hire private operators a decade ago to cope with a soaring prison population. The number of inmates has come down in recent years and that, combined with incidents of assault and other problems, helped lead to Thursday’s decision to phase out contracts with private operators. The REITs responded by saying any impact isn’t imminent and they will continue to work with government partners to ensure safe and secure operations.

The three main federal prison-related agencies accounted for 51 percent, or $911.8 million, of Corrections Corp.’s 2015 revenue, according to its annual report. The biggest chunk, 24 percent, came from the Department of Homeland Security’s Immigration & Customs Enforcement division, and isn’t affected by the Justice Department order. Nor is the second-biggest portion, the 16 percent that came from the U.S. Marshals Service, according to Meliker, the Canaccord Genuity analyst.

The agency that is directly affected, the federal prisons bureau, accounts for 7 percent of Corrections Corp.’s business, the company said Thursday. In 2015, the Bureau of Prisons generated 11 percent of the REIT’s revenue, or $190 million, according to its annual report.

The Justice Department’s action “was not a surprise to us” given that the Bureau of Prisons “has been very, very successful in reducing their system population,” Corrections Corp. Chief Executive Officer Damon Hininger said on a conference call with analysts Friday. “It was clear to us that their need for private-sector beds was likely to be scaled back. That is part of our value proposition. We provide customized solutions for our partners as they need them.”

Corrections Corp.’s largest state customer, the California Department of Corrections and Rehabilitation, isn’t affected by Thursday’s decision, although the state has been reducing its inmate count in compliance with a prior court order, said spokesman Joe Orlando. The department generated 11 percent of Corrections Corp.’s revenue, or $202.3 million, last year, according to the company’s annual report.

GEO Group said today that the Bureau of Prisons rescinded a previously granted contract renewal that extended its agreement to operate the company-owned D. Ray James Correctional Facility in Folkston, Georgia, through Sept. 30, 2018. GEO Group said it’s negotiating a new contract modification with the bureau.

(Updates with Corrections Corp. CEO’s comments in seventh paragraph.)

--With assistance from Sarah Mulholland To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net. To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Christine Maurus

©2016 Bloomberg L.P.

© Copyright 2017 Bloomberg News. All rights reserved.

   
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