Most people may not think of prison as an investment vehicle, but a pair of for-profit prison companies, CoreCivic (CXW) and GEO Group (GEO), are real estate investment trusts (REITs) that operate correctional facilities on behalf of federal and state government agencies.

The private prison industry began to take shape in the 1980s as incarceration levels expanded. Less than 9% of the nation’s total prison population are housed in these facilities, but this niche has generated calls from criminal justice reformers and politicians who accuse the companies of making profits off poorly-run prisons. In 2016, Sen. Kamala Harris sought to encourage a petition drive to put an end to for-profit prisons, writing on Facebook that they were “morally wrong, and they’re a rotten deal for American taxpayers. We should not incentivize large corporations to profit off the incarceration of millions of people in this country.”

Today, in her role as vice president-elect, Harris is not publicly prioritizing this issue. And while President-Elect Joe Biden’s campaign platform included opposition to private prisons, neither CXW or GEO have expressed concern over what could happen in the next four years. GEO Chairman and CEO George Zoley used his company’s Oct. 29 earnings call to remember that Biden’s previous years in the Executive Branch did not damage the private prison industry.

“We grew fairly steadily under the Obama-Biden administration previously,” he remarked. “And unless there’s a major change in border security, I don’t know that there will be much change.”

CXW President and CEO Damon Hininger used his Nov. 5 earnings call to observe that the U.S. Marshals Service relies entirely on private prisons because it lacks its own facilities.

“If there is a policy decision made where the Marshals Service can no longer use the private sector for whatever reason, that would be very, very hard, if not impossible, to effect,” he said.

Looking ahead into 2021, which stock is the stronger investment?

Latest Movements

Both companies became REITs in 2013, but CXW’s days as a REIT ends tomorrow. Back in August, the company announced it would change its corporate structure from a REIT to its previous C corporation status, effective Jan. 1. The company also announced a strategy to sell off its lower yielding non-core real estate assets – on Dec. 23, it sold 42 of its non-core government leased properties to a third party for an aggregate purchase price of $106.5 million.

“We believe our revised structure and strategy, combined with a resilient core business, will result in significantly more liquidity, a stronger balance sheet and lower cost of capital, which will enable us to reduce our reliance on the capital markets,” said Hininger. “Each day our employees work tirelessly to implement life-changing programs for the people entrusted to our care.  We’re excited about the opportunity to create value for our shareholders while growing in even more ways that help those in our care succeed with the next step in their lives.”

CXW’s Q3 revenue of $468.2 million was down from the $508.5 million in Q3 2019, while its Adjusted EBITDA of $94.6 million shrank from $115.4 million one year earlier. 

GEO’s Q3 earnings report included $579 million in revenue, down from $631.5 million one year earlier. Adjusted EBITDAre for the quarter was $112 million, down year-over-year from $124.8 million.

While GEO is remaining a REIT, the company acknowledged that the “COVID-19 pandemic continues to have a negative impact on several segments” of the company, with declining occupancy rates at its facilities coupled with increased spending to ensure health safety standards during the pandemic. On his earnings call, Zoley highlighted that GEO paid down approximately $80 million in net debt during 2020 and planned to “pay down approximately $100 million in net debt this year and hope to be able to allocate a minimum of $50 million in excess cash flow annually thereafter towards net debt repayment.”

Recent Financial Performance

CXW is trading at $6.78, closer to its 52-week low of $5.76 than its 52-week high of $17.90. The stock came into 2020 on a high note but tumbled with the rest of the market when the coronavirus pandemic jolted the economy in March – to date, the stock has yet to regain its momentum. The stock ranks #42 out of 51 in the REITs – Diversified category.

GEO is trading at $9.00, just above its 52-week low of $8.00 and far from its 52-week high of $18.42. Not unlike CXW, it never bounced back from the market’s March plummet and lost even more vibrancy in October – though, ironically, it gained a bit more verve after the election. The stock ranks #40 out of 51 in the REITs – Diversified category.

Both stocks have a “D” (for sell) grade in the proprietary POWR Ratings. 

The Winner

Both stocks had a rough 2020 and are entering the new year in an enervated state. CXW’s exit from the REIT structure should help revive its some of its deflated vitality, but both companies have underlying issues that will take time to address. 

However, if the new Biden administration retains the status quo on private prisons and the incarcerated population rises again in a post-pandemic era, these stocks may regain their vibe. A wait-and-see attitude is definitely recommended through the first half of 2021.

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CXW shares were trading at $6.54 per share on Thursday morning, down $0.24 (-3.54%). Year-to-date, CXW has declined -59.91%, versus a 17.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Phil Hall

Phil is an experienced financial journalist responsible for generating original content on the weekly Fairfield County Business Journal and Westchester County Business Journal, plus their respective daily online news sites, podcasts and video interview series.  He is the winner of 2018, 2019 and 2020 Connecticut Press Club Awards and 2019 and 2020 Connecticut Society of Professional Journalists Award for editorial output. More...

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