Prison REITs Slide As ICE Detention Practice Is Questioned

The month of August has not treated well Corrections Corporation of America (NYSE:CXW) and The GEO Group (NYSE:GEO) . The Department of Justice announced on Aug 18 that the Bureau of Prisons would end the use of private prisons in a phased manner. Now, the Department of Homeland Security has revealed its intention to evaluate Immigration and Customs Enforcement's (“ICE”) use of private immigration detention facilities. Department of Homeland Security is in fact the overseer of ICE.

Now doubt, the two prison REIT stocks suffered a huge blow for such revelations as investors worried about the fate of the private prison operators and their cash flows. As such, shares of Corrections Corporation and The GEO Group slid over 40% this month. This included a decline of over 4% and 7% for Corrections Corporation of America and The GEO Group, respectively, on Tuesday as well.

On Aug 29, Department of Homeland Security Secretary Jeh C. Johnson directed for the establishment of a Subcommittee of the Council for the review of “current policy and practices concerning the use of private immigration detention and evaluate whether this practice should be eliminated.” All aspects regarding ICE’s detention policy and practice plus fiscal considerations would be taken into account for this purpose. This subcommittee is slated to submit the report by Nov 30.

Earlier, when the Department of Justice (DOJ) announced that the Bureau of Prisons would lower and finally terminate the use of private prisons, a memo by Deputy Attorney General Sally Yates revealed that the inmates’ population is declining. Executives have concluded that such facilities not only lack safety and security standards, but also do not save significantly on costs. Moreover, these 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.

In Conclusion

Such moves would affect the business of Corrections Corporation and The Geo Group and some panic-stricken investors anticipate that eventually ICE and the U.S. Marshals Service may stop keeping detainees in private prisons.

But as of now, the extent might be limited with the bulk of U.S. prisoner population being housed in state prisons. Also, contracts with the U.S. Marshals Service (USMS) remain unaffected and a point to note here is that USMS does not possess its own facilities. The Immigration and Customs Enforcement too does not own beds.

Further, in recent years, prison REITs have opted for diversification, focusing on other services, building re-entry facilities and stressing on rehabilitation programs. This might partly help prison REITs escape the negative impact.

Currently, Corrections Corporation carries a Zacks Rank #3 (Hold), while The Geo Group has a Zacks Rank #5 (Strong Sell).

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