Everything You Need To Know About The Loss Of Federal Contracts For Prison REITs

Private prison stock prices have been fluctuating following the US Justice Department’s announcement it would cease doing business with private prison operators.

The decision has greatly impacted two publicly traded private prison REITs in particular—Corrections Corporation of America and GEO Group Inc—which both conduct business with state and federal entities.

Trepp Talk senior director of research Susan Persin tells Bisnow the termination won’t be immediate, but will gradually take effect as the Bureau of Prisons phases out its use of private prisons, allowing contracts to expire.

“The companies have contracts with the prisons so it’s not like their prisons will be empty tomorrow,” Susan tells us. She says these REITS aren’t overly exposed to the Federal Bureau of Prisons. As of June 30, 13.8% of GEO Group’s revenue stemmed from federal prisons, as did 9% of Corrections Corp’s revenue. 

“It’s not like they’re going to go to zero revenue because of that,” Susan says.

Deputy Attorney General Sally Yates (above) wrote to the Federal Bureau of Prisons Aug. 18 asking the bureau to reduce its use of privately operated prisons.

The Fed's relationship with private prisons began 10 years ago out of necessity. Prison populations had skyrocketed to 220,000 inmates between 1980 and 2013—that’s an 800% jump—and federal prisons couldn't accommodate the number. But, Yates wrote in her letter populations have since declined to less than 195,000 inmates. That, in addition to concerns regarding inmate conditions in private prisons, led to the termination of business.

“Private prisons served an important role during a difficult period, but time has shown that they perform poorly compared to our own Bureau facilities,” Yates wrote. “They simply do not provide the same level of correctional services, programs and resources [and] do not save substantially on costs.” 

Following Yates' letter and the Fed's announcement, Corrections Corp and GEO Group stocks plunged to historic lows. The nation’s largest private prison operator, Corrections Corp, suffered a 35% fall to $17.57 when trading closed Aug. 18, and GEO Group ceased trading at to $19.51—a 40% dive.

Though stocks recovered mildly days later after analysts assured investors the effects of the loss would be minimal, stocks dove again following the Homeland Security Departments announcement Monday it may cease using private immigration detention centers as well. Shares in the prison industry plunged accordingly—Corrections Corporation of America fell 9.7% and the GEO Group slipped 6.5% to $20.49.

“There was definitely a knee-jerk reaction that caused stocks to tumble on the 18th, and they’ve recovered somewhat since then,” Susan tells us. “In terms of the wider effect of the industry, prison REITs are specialty REITs, so unlike your typical REITs they don’t respond to traditional supply-and-demand fundamentals. They are at the mercy of politics and government.”