Are Prison REITs Worried About DOJ's Decision?

A Washington Post report revealed that the Department of Justice (DOJ) plans to end the use of private prisons in a phased manner. Following this news, shares Corrections Corporation of America (NYSE:CXW) and The GEO Group, Inc. (NYSE:GEO) tanked on Aug 18.

Officials were instructed to review the contracts as each reaches the term end. Subsequently, they will either not renew contracts or let them expire or reduce their scope.

Reasons for Winding Up Private Prisons

Announced in a memo by Deputy Attorney General Sally Yates, this decision to wind up privately run federal prisons comes at a time when inmates population is declining and executives have concluded that such facilities not only lack safety and security standards, but also do not save significantly on costs, and are less efficient at offering correctional services than the federal Bureau of Prison facilities. Also, a recent report from the Justice Department’s inspector general revealed that safety and security incidents were more in private prisons than at the Bureau facilities.

How Prison Stocks Reacted to DOJ

With these revelations, investors worried about the fate of the private prison operators and their cash flows, and hurriedly disposed their stakes in Corrections Corporation and The Geo Group. The panic was so intense that these stocks fell over 40% during the session and their trading was temporarily halted. Finally, Corrections Corporation and The Geo Group ended the day at $17.57 and $19.51, respectively, declining 35.45% and 39.58% from the previous day’s close.

Any Chance of Recovery?

No doubt, the move would affect the business of Corrections Corporation and The Geo Group which run the majority of the 13 impacted facilities. But the extent seems to be limited with the bulk of U.S. prisoner population being housed in state prisons. This is because Yates’ directives are applicable for the federal Bureau of Prisons correctional facilities. That constitutes a smaller fraction of the prison REIT’s total business.

In fact, contracts with the U.S. Marshals Service as well as the Immigration and Customs Enforcement (“ICE”) agency remains unaffected. Further, in recent years, prison REITs have opted for diversification, focusing on other services, building re-entry facilities and stressing on rehabilitation programs. That should partly help in mitigating the negative impact.

Nevertheless, some panic-stricken investors now worry that eventually ICE and the U.S. Marshals Service may stop keeping detainees in private prisons. Well time can only give the answer to this.

Currently, Corrections Corp. carries a Zacks Rank #3 (Hold), while The Geo Group has a Zacks Rank #4 (Sell).


CORRECTIONS CRP (CXW): Free Stock Analysis Report

GEO GRP INC/THE (GEO): Free Stock Analysis Report

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