REIT Conversion for Private Prison players

Posted On Tuesday, 14 May 2013 15:32 Published by Commercial Property News
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Private prisons are big business and two big players with facilities in South Africa, US, Australia and the UK have just undergone REIT conversion. 

Mangaung PrisonCorrections Corporation of America (CXW) and GEO Group (GEO) each received favourable Private Letter Rulings from the IRS and began operating under REIT rules.

By reducing corporate tax liability, improving access to capital and lowering the cost of capital the REIT structure provides more opportunities for these companies which are capital intensive by nature.

South Africa

Mangaung Maximum Security Private Prison (MMSP), was the first of two South African Private Prisons and the brainchild of the first Post-Apartheid Minister of Correctional Services, Dr. Sipo Mzimela.

The South African government signed two 25-year concessions for maximum security prisons in Bloemfontein and Louis Trichardt Makhado) as part of its Department of Public Works' Asset Procurement and Operating Partnership Systems (APOPS) in 2000. The two winning consortia were responsible for designing, building, financing, operating and transferring the prisons. The facilities hold about 3,000 inmates each and were fully operational in 2002 at a cost of about $245 million (Bloemfontein) and $259 million (Louis Trichardt), respectively. The Geo Group now manage these.

The prison gets 60% of its revenue from company-owned or leased real estate.

The Geo Group is the second largest of the two big players in the US. It has a current market capitalisation of $2.5 billion and manages 100 correctional, detention, and community re-entry centres with 73,000 beds across the US, Australia, South Africa, and the UK.

The prison gets 60% of its revenue from company-owned or leased real estate. The company estimates $45 to $50 million in annual tax savings from its REIT conversion. In January, GEO raised its quarterly dividend from $0.20 in 2012 to $0.50 a share, resulting in an implied yield of 5.6%. Shares of GEO have more than doubled (+105%) during the past twelve months.

Controversy

It’s worth noting that some of these facilities are controversial because their profit motive encourages incarceration.

Private prisons achieve profit margins by controlling costs and spending less for personnel than their public counterparts, which raises the issue of the quality of staffing at these privately-run facilities.

REIT conversion for Geo Group has improved its financial positions and contributes to sharp growth in their stock values during the past year. 

Last modified on Saturday, 18 May 2013 18:07

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