CORRECTIONS CORP AMER CXW S W
June 18, 2016 - 10:31am EST by
value_31
2016 2017
Price: 33.90 EPS 1.82 1.96
Shares Out. (in M): 118 P/E 18.6 17.3
Market Cap (in $M): 3,983 P/FCF 0 0
Net Debt (in $M): 1,352 EBIT 0 0
TEV ($): 5,334 TEV/EBIT 0 0
Borrow Cost: General Collateral

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  • Prisons
  • REIT
 

Description

COMPANY SUMMARY

 

Corrections Corporation of America (“CXW”) is the largest provider of prison detention and corrections services to governmental agencies in the United States.  The Company owns correctional and detention facilities and is organised as a REIT. 

SUMMARY THESIS

(1) Prison population is falling (fiscal & policy reasons driving this) – prison population peaked in 2009 & has been falling since 

(2) Private Prison Operators are the ‘swing capacity’ in the system – private prison operators captured a disproportionate share of the growth in inmate populations (up to 2009).  As populations fall it’s easier to cancel contracts with private operators vs. closing government owned facilities (government employee redundancies, union issues, etc.)

(3) You can see this dynamic ‘in the numbers’.  For CXW since 2009:

  • 'Managed Only’ Facilities:  # of facilities managed has fallen from 21 (~25k beds) at 31-Dec-09 to 11 (~14k beds) at 31-Mar-16.  This is predominantly contract expiry/cancellation
  • ‘Owned & Operated’ Facilities: headline numbers show % occupancy has fallen from 88% during 2009 to 72% during Q1’16.  CXW currently has 9 owned facilities (out of 60) that are idle.  There are a further 2 facilities that were impaired (and thus are no longer reported) in Q1’15 (i.e. now no longer counts in the denominator for the calculation of utilization) (note: there were zero idled facilities in mid-2008)
  • Recent facility lease in Oklahoma indicates the challenged state of the market:  In May CXW announced a 5 year lease agreement for the North Fork Correctional Facility.  The structure of this lease provided the counter-party a ~1.5 years rent free period at the beginning of the lease (i.e. 1.5 years out of 5 years);

 

(4) Contracts are typically short duration – a very large percentage of contracts expire over the next 2-3 years.  Historically renewal rates have been high (as populations grew & private populations grew disproportionately).  This has changed recently.  If the structural decline thesis is correct the short duration contracts are the mechanism through which it get transmitted (& potentially quickly).  Also note counterparties have the right to cancel contracts unilaterally before expiry in certain circumstances (e.g. failure to secure sufficient budget appropriations);

(5) This is a largely fixed cost business – minimum staffing & other fixed costs mean the operating leverage from lost revenue (declining utilization) is significant.  There is financial leverage in addition to the operating leverage

(6) There is no alternative use for the real estate – For example CXW has had facilities idle since 2008. They just sit there empty.  Any ‘real estate value underpinning the downside’ thesis seems unlikely;

(7) Dividends exceed free cash flow – e.g. since REIT conversion CXW has consistently paid higher dividends than actual FCF (FFO & AFFO reported by the company are inflated).  This has gotten progressively worse as operations have deteriorated

(8) CXW has given counterparties a number of options to purchase facilities at or below book value – CXW currently trades at ~2.8x P/BV.  ~20% of BV is represented by facilities that either (i) automatically revert to counterparties at the end of the lease (in 2017); or (ii) where counter-parties have the option to acquire the facility at or below book value; or (iii) are currently idle;     

MORE DETAIL ON EACH OF THE THESIS LIMBS

(1) Prison population is falling 

  • The United States has the largest prisoner population in the world[1] and the highest incarceration rate of any large country in the world[2].  For perspective, the US prisoner population is larger than the aggregate total prisoner populations of the other G7 countries + China
  •  Total State + Federal populations in the US peaked in 2009 and have been falling since – A combination of policy & fiscal reasons are driving this
  • Even though aggregate federal prison population numbers are smaller than state population for private prison operators’ federal populations are more important than state populations. For example CXW generates more than 50% of its revenues from federal customers
  • There are a number of changes that have occurred or are slated to occur that will continue the downward trend
    • Sentencing guideline changes for drug crimes – ~1/4 of inmates impacted; sentences estimated to be reduced by 19% on average; offenders commenced being released from November 2015[3]
    • Bipartisan proposed changes to the Sentencing legislation[4]

 

 

(2) Private Prison Operators are the ‘swing capacity’ in the system

  • While prisoner populations (and especially federal populations) were growing private prison operators captured a disproportionate share of the growth in inmate populations[5]
    • Prison populations in private facilities increased from 5.9% of total in 2001 to 6.8% of total in 2009 (increase from 8.1% to 16.4% for federal prisoners)
  • As populations fall it’s easier to cancel contracts with private operators vs. closing government owned facilities (government employee redundancies, union issues, etc.)
  • In general where the prisoner populations have fallen, private operators have suffered.  For example:
    • Texas: Because offender populations were declining, the Legislature reduced appropriations for contract prisons, privately operated state jails, and residential pre-parole facilities by $97.3 million to reduce correctional bed capacity, resulting in the closure of the Mineral Wells Pre-Parole Transfer Facility and Dawson State Jail
    • Kentucky: Citing a declining prison population and recent criminal justice reforms, Kentucky officials opted in July 2013 not to renew the state’s last remaining private prison contract with Corrections Corporation of America to house nearly 800 inmates in the Marion Adjustment Center.  The state chose not to renew private prison contracts at two other facilities in 2010 and 2012.  “Our decision wasn’t based on an opinion of private prisons,” Kentucky Justice Secretary J. Michael Brown told The Courier-Journal in September. “CCA was a great partner. We could not have operated without that partnership while our (inmate) population was trending up.”
    • California: In 2011 the US Supreme Court ruled that overcrowding in prisons was in breach of the US constitution (cruel & unusual punishment).  As a result CA decided to send a number of inmates out-of-state.  They have subsequently built more in-state prisons & reduced the overall population.  As a result the use of private facilities has reduced significantly  

 

 
(3) You can see the impact of reduced populations in CXW's operational performance

'Managed Only’ Facilities:  

  • # of facilities managed has fallen from 21 (~25k beds) at 31-Dec-09 to 11 (~14k beds) at 31-Mar-16.  This is predominantly contract expiry/cancellation.  Additionally capacity utilisation has fallen
  31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16
Number of Facilities (#) 21 21 21 20 16 12 11 11
Average available beds (#) 25,101 24,285 26,390 25,324 21,306 16,763 15,048 13,898
Average compensated population (#) 24,238 23,287 25,269 24,340 20,575 15,944 14,104 12,980
Average compensated occupancy (%) 96.6% 95.9% 95.8% 96.1% 96.6% 95.1% 93.7% 93.4%
 
 

Owned & operated Facilities:

  • % occupancy rate has fallen from 88% during 2009 to 72% during Q1’16
 

 

 
  31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16
Number of Facilities (#) 44 45 46 47 49 49 60 60
Average available beds (#) 61,051 62,518 63,797 66,538 67,588 66,179 65,073 71,296
Average compensated population (#) 53,893 55,033 55,746 56,722 55,123 53,292 52,007 51,004
Average compensated occupancy (%) 88.3% 88.0% 87.4% 85.2% 81.6% 81.0% 79.9% 71.5%
 
  • At 31-Mar-16 CXW had 9 owned facilities (out of 60) that are idle - a total of 9,650 beds.  There are a further 2 facilities that were impaired (and thus are no longer reported) in Q1’15 (i.e. now no longer counts in the denominator for the calculation of utilization).  These two facilites represent a further 2,953 beds.  Importantly, there were zero idled facilities in mid-2008
 
Facility First Idled

Beds    

  Notes
Shelby Training Center Aug-08 200   Tennessee Department of Children’s Services moved operations under its control
Queensgate Correctional Facility* Dec-08 850   Hamilton County, Ohio terminted the lease due to funding issues
Prairie Correctional Facility Feb-10 1,600   Minnesota and Washington had excess capacity and moved prisoners in-state
Huerfano County Correctional Center Mar-10 752   Arizona proposed budgets to phase out the utilization of out-of-state beds (moving in-state)
Diamondback Correctional Facility May-10 2,160   Arizona proposed budgets to phase out the utilization of out-of-state beds (moving in-state)
Otter Creek Correctional Center Jun-12 656   Kentucky moved prisoners to an in-state facility
MineralWells Pre-Parole Transfer Facility*     Aug-13 2,103   Texas did not renew due to a legislative budget reduction
Marion Adjustment Center Sep-13 826   Kentucky decided not to seek to renew contract
Lee Adjustment Center Jun-15 816   Vermont decided not to seek to renew contract
Leo Chesney Correctional Center Sep-15 240   Leased to GEO Group.  Contract not renewed
North Fork  Dec-15 2,400   Out-of State facility for California.  Re-let from July 2016

* No longer included on CXW's list of 'idled' facilities as a result of impairement that was completed in Q1'15

 

(4) Contracts are typically short duration 

  • CXW provides facility level disclosure quarterly, including details of contract counter-party and contract length.  A very large percentage of contracts expire over the next 2-3 years
    • >80% of CXW's 'managed only' contracts expire over the next 12 months
    • >75% of CXW's 'owned & operated' facilities contracts expire over the next 24 months   
  • Historically renewal rates have been high as populations grew & private populations grew disproportionately. This changed as prisoner populations started to decline (from 2009) as evidenced by the significant number of facilities that have been forced to idle (see above)  
  • If the structural decline thesis is correct the short duration contracts are the mechanism through which it get transmitted
  • Also note counterparties have the right to cancel contracts unilaterally before expiry in certain circumstances (e.g. failure to secure sufficient budget appropriations);

(5) This is a largely fixed cost business 

  • The nature of the business necessitates that fixed costs are high - e.g. the largest cost elements are labour (minimum staffing) and other non-variable costs
  • CXW's fixed costs (inc. depreciation) represent approximately 2/3 of revenues (the remainder is variable costs & profit)
  • The fixed cost base means operating leverage from lost revenue (declining utilization) is significant
    • Note: some of this has been offset to date as a result of mimimum guarantees contained in contracts.  This has offered CXW an element of margin protection to date however this cannot continue indefinitely if utilization does not improve (e.g. customers will either not renew contracts or renew them for smaller minimum guarantees)
  • In addition to the significant operating leverage CXW also has significant financial leverage - leverage has been increasing as a result of acquisitions & Dividends being > FCF (see (7) below for more details)

(6) There is no alternative use for the real estate

  • The nature of the assets mean there is no alternate use in the event they are empty
  • For example CXW has had facilities idle since 2008. They just sit there empty  
  • Any ‘real estate value underpinning the downside’ thesis seems unlikely

(7) Dividends exceed free cash flow

  • Since REIT conversion CXW has consistently paid higher dividends than actual FCF

 

  12 Mths 12 Mths 12 Mths 3 Mths Total Since REIT
(US$ Millions) 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16 Conversion*
Operating Cash Flow $369.5 $423.6 $399.8 $120.3 $1,313.2
Working Capital ($42.1) ($70.6) ($0.1) ($26.2) ($139.1)
Normalized Operating Cash Flow $327.4 $352.9 $399.7 $94.1 $1,174.1
Investing Cash Flow exc. development & expansion capex ($61.3) ($111.1) ($86.0) ($4.6) ($263.1)
Development capex: Otay Mesa Detention Center# ($3.1) ($69.7) ($87.3) ($160.1)
Normalized Free Cash Flow b/f expansion capex $263.0 $172.1 $226.3 $89.4 $750.9
Acquisitions ($36.3) ($158.4) ($1.8) ($196.4)
Other development & expansion capex ($24.9) ($16.1) ($77.6) ($7.8) ($126.3)
Normalized Free Cash Flow $201.9 $156.1 ($9.6) $79.9 $428.2
           
Dividend Paid ($299.4) ($234.0) ($250.7) ($65.1) ($849.3)
           
Dividend Paid / Normalized FCF b/f expansion capex 113.8% 136.0% 110.8% 72.8% 113.1%
Dividend Paid / Normalized FCF 148.3% 150.0% n/m 81.5% 198.3%
           

# This expenditure is best thought of as maintenance capex.  Ownership of the San Diego Correctional Facility reverted to the County upon expiry of the ground lease in December 2015.  The Otay Mesa Detention Center is being constructed to replace the San Diego Correctional Facility and retain those prisoners (i.e. it's not an expansion).  Without this expenditure the cash flows from those prisoners would have disappeared.  CXW had not provisioned for this expenditure in its accounts and instead ran the expenditure through the investing cash flow line as 'expansion' capex. 

  • The company represents it's dividend relative to Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) but both of these numbers are inflated because 'maintenance' capex appears to be significantly understated
    • 'Maintenance' capex as presented in AFFO is 27% of depreciation of real estate assets (since REIT conversion)
    • 'Maintenance' capex as presented in AFFO is 29% of investing cash flow excluding development & expansion capex (since REIT conversion)
  • Adjusting AFFO for a more accurate representation of maintenance capex (i.e. depreciation) results in a dividend payout ratio of 111% since REIT conversion
    • Note: Since REIT conversion Investing Cash flow excluding development & expansion capex (i.e. cash capex) is broadly in-line with depreciation of real estate assets.  The difference between 'maintenance' capex as presented by the company and actual cash capex is ~$187 million
  12 Mths 12 Mths 12 Mths 3 Mths Total Since REIT
(US$ Millions) 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16 Conversion*
Net Income $300.8 $195.0 $221.9 $46.3 $746.0
Depreciation of real estate assets $81.3 $85.6 $90.2 $23.3 $280.4
Other adjustments# ($87.4) $30.0 $5.3 $1.1 ($51.0)
Funds From Operations (FFO) $294.7 $310.5 $317.3 $70.8 $993.4
Maintenance capex ($21.0) ($25.5) ($26.6) ($3.4) ($76.4)
Stock based compensation $12.9 $14.0 $15.4 $3.8 $46.1
Amortization of debt costs & non-cash interest $3.5 $3.0 $2.9 $0.8 $10.2
Adjusted Funds From Operations (AFFO) $290.2 $302.1 $309.0 $72.0 $973.3
Capex Adjusted AFFO^  $229.9 $242.0 $245.4 $52.1 $768.5
           
Investing Cash Flow exc. development & expansion capex ($61.3) ($111.1) ($86.0) ($4.6) ($263.1)
Dividends Paid ($299.4) ($234.0) ($250.7) ($65.1) ($849.3)
           
Maintenance Capex / Depreciation of real estate assets 25.8% 29.8% 29.5% 14.4% 27.3%
Maintenance Capex / Investing Cash Flow exc. D&E capex 34.3% 22.9% 30.9% 72.2% 29.0%
           
Dividends Paid / AFFO 103.2% 77.5% 81.1% 90.4% 87.3%
Dividends / Adjusted AFFO 130.3% 96.7% 102.1% 125.2% 110.5%

# Impairment of real estate assets, extraordinary items, goodwill impairments, tax benefit from reversal of deferred tax
^ Represents AFFO + maintenance capex - depreciation of real estate assets

 

(8) CXW has given counterparties a number of options to purchase facilities at or below book value 

  • CXW currently trades at ~2.8x Price to Book Value
  • ~20% of Book Value is represented by facilities where value should be capped at or around book value, which implies the residual ~80% of BV is trading at very high premium
  • Specifically, the facilities that should be capped at or around Book Value:  
    • (i) Facilities that automatically revert to counterparties at the end of the lease (1 facility, 1,500 beds, $18m revenue; $1m book value) 
    • (ii) Facilities where counter-parties have the option to acquire the facility at or below book value (7 facilities, 11,336 beds, $368m book value); and 
    • (iii) Facilities that are currently idle (9 Facilities, 9,547 beds, $108m Book Value); 
The Company's 10-K has details of each of facilities above. 


 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

  • Continued operational deterioration
  • Dividend Cut
    sort by   Expand   New

    Description

    COMPANY SUMMARY

     

    Corrections Corporation of America (“CXW”) is the largest provider of prison detention and corrections services to governmental agencies in the United States.  The Company owns correctional and detention facilities and is organised as a REIT. 

    SUMMARY THESIS

    (1) Prison population is falling (fiscal & policy reasons driving this) – prison population peaked in 2009 & has been falling since 

    (2) Private Prison Operators are the ‘swing capacity’ in the system – private prison operators captured a disproportionate share of the growth in inmate populations (up to 2009).  As populations fall it’s easier to cancel contracts with private operators vs. closing government owned facilities (government employee redundancies, union issues, etc.)

    (3) You can see this dynamic ‘in the numbers’.  For CXW since 2009:

     

    (4) Contracts are typically short duration – a very large percentage of contracts expire over the next 2-3 years.  Historically renewal rates have been high (as populations grew & private populations grew disproportionately).  This has changed recently.  If the structural decline thesis is correct the short duration contracts are the mechanism through which it get transmitted (& potentially quickly).  Also note counterparties have the right to cancel contracts unilaterally before expiry in certain circumstances (e.g. failure to secure sufficient budget appropriations);

    (5) This is a largely fixed cost business – minimum staffing & other fixed costs mean the operating leverage from lost revenue (declining utilization) is significant.  There is financial leverage in addition to the operating leverage

    (6) There is no alternative use for the real estate – For example CXW has had facilities idle since 2008. They just sit there empty.  Any ‘real estate value underpinning the downside’ thesis seems unlikely;

    (7) Dividends exceed free cash flow – e.g. since REIT conversion CXW has consistently paid higher dividends than actual FCF (FFO & AFFO reported by the company are inflated).  This has gotten progressively worse as operations have deteriorated

    (8) CXW has given counterparties a number of options to purchase facilities at or below book value – CXW currently trades at ~2.8x P/BV.  ~20% of BV is represented by facilities that either (i) automatically revert to counterparties at the end of the lease (in 2017); or (ii) where counter-parties have the option to acquire the facility at or below book value; or (iii) are currently idle;     

    MORE DETAIL ON EACH OF THE THESIS LIMBS

    (1) Prison population is falling 

     

     

    (2) Private Prison Operators are the ‘swing capacity’ in the system

     

     
    (3) You can see the impact of reduced populations in CXW's operational performance

    'Managed Only’ Facilities:  

      31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16
    Number of Facilities (#) 21 21 21 20 16 12 11 11
    Average available beds (#) 25,101 24,285 26,390 25,324 21,306 16,763 15,048 13,898
    Average compensated population (#) 24,238 23,287 25,269 24,340 20,575 15,944 14,104 12,980
    Average compensated occupancy (%) 96.6% 95.9% 95.8% 96.1% 96.6% 95.1% 93.7% 93.4%
     
     

    Owned & operated Facilities:

    • % occupancy rate has fallen from 88% during 2009 to 72% during Q1’16
     

     

     
      31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16
    Number of Facilities (#) 44 45 46 47 49 49 60 60
    Average available beds (#) 61,051 62,518 63,797 66,538 67,588 66,179 65,073 71,296
    Average compensated population (#) 53,893 55,033 55,746 56,722 55,123 53,292 52,007 51,004
    Average compensated occupancy (%) 88.3% 88.0% 87.4% 85.2% 81.6% 81.0% 79.9% 71.5%
     
    • At 31-Mar-16 CXW had 9 owned facilities (out of 60) that are idle - a total of 9,650 beds.  There are a further 2 facilities that were impaired (and thus are no longer reported) in Q1’15 (i.e. now no longer counts in the denominator for the calculation of utilization).  These two facilites represent a further 2,953 beds.  Importantly, there were zero idled facilities in mid-2008
     
    Facility First Idled

    Beds    

      Notes
    Shelby Training Center Aug-08 200   Tennessee Department of Children’s Services moved operations under its control
    Queensgate Correctional Facility* Dec-08 850   Hamilton County, Ohio terminted the lease due to funding issues
    Prairie Correctional Facility Feb-10 1,600   Minnesota and Washington had excess capacity and moved prisoners in-state
    Huerfano County Correctional Center Mar-10 752   Arizona proposed budgets to phase out the utilization of out-of-state beds (moving in-state)
    Diamondback Correctional Facility May-10 2,160   Arizona proposed budgets to phase out the utilization of out-of-state beds (moving in-state)
    Otter Creek Correctional Center Jun-12 656   Kentucky moved prisoners to an in-state facility
    MineralWells Pre-Parole Transfer Facility*     Aug-13 2,103   Texas did not renew due to a legislative budget reduction
    Marion Adjustment Center Sep-13 826   Kentucky decided not to seek to renew contract
    Lee Adjustment Center Jun-15 816   Vermont decided not to seek to renew contract
    Leo Chesney Correctional Center Sep-15 240   Leased to GEO Group.  Contract not renewed
    North Fork  Dec-15 2,400   Out-of State facility for California.  Re-let from July 2016

    * No longer included on CXW's list of 'idled' facilities as a result of impairement that was completed in Q1'15

     

    (4) Contracts are typically short duration 

    • CXW provides facility level disclosure quarterly, including details of contract counter-party and contract length.  A very large percentage of contracts expire over the next 2-3 years
      • >80% of CXW's 'managed only' contracts expire over the next 12 months
      • >75% of CXW's 'owned & operated' facilities contracts expire over the next 24 months   
    • Historically renewal rates have been high as populations grew & private populations grew disproportionately. This changed as prisoner populations started to decline (from 2009) as evidenced by the significant number of facilities that have been forced to idle (see above)  
    • If the structural decline thesis is correct the short duration contracts are the mechanism through which it get transmitted
    • Also note counterparties have the right to cancel contracts unilaterally before expiry in certain circumstances (e.g. failure to secure sufficient budget appropriations);

    (5) This is a largely fixed cost business 

    • The nature of the business necessitates that fixed costs are high - e.g. the largest cost elements are labour (minimum staffing) and other non-variable costs
    • CXW's fixed costs (inc. depreciation) represent approximately 2/3 of revenues (the remainder is variable costs & profit)
    • The fixed cost base means operating leverage from lost revenue (declining utilization) is significant
      • Note: some of this has been offset to date as a result of mimimum guarantees contained in contracts.  This has offered CXW an element of margin protection to date however this cannot continue indefinitely if utilization does not improve (e.g. customers will either not renew contracts or renew them for smaller minimum guarantees)
    • In addition to the significant operating leverage CXW also has significant financial leverage - leverage has been increasing as a result of acquisitions & Dividends being > FCF (see (7) below for more details)

    (6) There is no alternative use for the real estate

    • The nature of the assets mean there is no alternate use in the event they are empty
    • For example CXW has had facilities idle since 2008. They just sit there empty  
    • Any ‘real estate value underpinning the downside’ thesis seems unlikely

    (7) Dividends exceed free cash flow

    • Since REIT conversion CXW has consistently paid higher dividends than actual FCF

     

      12 Mths 12 Mths 12 Mths 3 Mths Total Since REIT
    (US$ Millions) 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16 Conversion*
    Operating Cash Flow $369.5 $423.6 $399.8 $120.3 $1,313.2
    Working Capital ($42.1) ($70.6) ($0.1) ($26.2) ($139.1)
    Normalized Operating Cash Flow $327.4 $352.9 $399.7 $94.1 $1,174.1
    Investing Cash Flow exc. development & expansion capex ($61.3) ($111.1) ($86.0) ($4.6) ($263.1)
    Development capex: Otay Mesa Detention Center# ($3.1) ($69.7) ($87.3) ($160.1)
    Normalized Free Cash Flow b/f expansion capex $263.0 $172.1 $226.3 $89.4 $750.9
    Acquisitions ($36.3) ($158.4) ($1.8) ($196.4)
    Other development & expansion capex ($24.9) ($16.1) ($77.6) ($7.8) ($126.3)
    Normalized Free Cash Flow $201.9 $156.1 ($9.6) $79.9 $428.2
               
    Dividend Paid ($299.4) ($234.0) ($250.7) ($65.1) ($849.3)
               
    Dividend Paid / Normalized FCF b/f expansion capex 113.8% 136.0% 110.8% 72.8% 113.1%
    Dividend Paid / Normalized FCF 148.3% 150.0% n/m 81.5% 198.3%
               

    # This expenditure is best thought of as maintenance capex.  Ownership of the San Diego Correctional Facility reverted to the County upon expiry of the ground lease in December 2015.  The Otay Mesa Detention Center is being constructed to replace the San Diego Correctional Facility and retain those prisoners (i.e. it's not an expansion).  Without this expenditure the cash flows from those prisoners would have disappeared.  CXW had not provisioned for this expenditure in its accounts and instead ran the expenditure through the investing cash flow line as 'expansion' capex. 

    • The company represents it's dividend relative to Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) but both of these numbers are inflated because 'maintenance' capex appears to be significantly understated
      • 'Maintenance' capex as presented in AFFO is 27% of depreciation of real estate assets (since REIT conversion)
      • 'Maintenance' capex as presented in AFFO is 29% of investing cash flow excluding development & expansion capex (since REIT conversion)
    • Adjusting AFFO for a more accurate representation of maintenance capex (i.e. depreciation) results in a dividend payout ratio of 111% since REIT conversion
      • Note: Since REIT conversion Investing Cash flow excluding development & expansion capex (i.e. cash capex) is broadly in-line with depreciation of real estate assets.  The difference between 'maintenance' capex as presented by the company and actual cash capex is ~$187 million
      12 Mths 12 Mths 12 Mths 3 Mths Total Since REIT
    (US$ Millions) 31-Dec-13 31-Dec-14 31-Dec-15 31-Mar-16 Conversion*
    Net Income $300.8 $195.0 $221.9 $46.3 $746.0
    Depreciation of real estate assets $81.3 $85.6 $90.2 $23.3 $280.4
    Other adjustments# ($87.4) $30.0 $5.3 $1.1 ($51.0)
    Funds From Operations (FFO) $294.7 $310.5 $317.3 $70.8 $993.4
    Maintenance capex ($21.0) ($25.5) ($26.6) ($3.4) ($76.4)
    Stock based compensation $12.9 $14.0 $15.4 $3.8 $46.1
    Amortization of debt costs & non-cash interest $3.5 $3.0 $2.9 $0.8 $10.2
    Adjusted Funds From Operations (AFFO) $290.2 $302.1 $309.0 $72.0 $973.3
    Capex Adjusted AFFO^  $229.9 $242.0 $245.4 $52.1 $768.5
               
    Investing Cash Flow exc. development & expansion capex ($61.3) ($111.1) ($86.0) ($4.6) ($263.1)
    Dividends Paid ($299.4) ($234.0) ($250.7) ($65.1) ($849.3)
               
    Maintenance Capex / Depreciation of real estate assets 25.8% 29.8% 29.5% 14.4% 27.3%
    Maintenance Capex / Investing Cash Flow exc. D&E capex 34.3% 22.9% 30.9% 72.2% 29.0%
               
    Dividends Paid / AFFO 103.2% 77.5% 81.1% 90.4% 87.3%
    Dividends / Adjusted AFFO 130.3% 96.7% 102.1% 125.2% 110.5%

    # Impairment of real estate assets, extraordinary items, goodwill impairments, tax benefit from reversal of deferred tax
    ^ Represents AFFO + maintenance capex - depreciation of real estate assets

     

    (8) CXW has given counterparties a number of options to purchase facilities at or below book value 

    • CXW currently trades at ~2.8x Price to Book Value
    • ~20% of Book Value is represented by facilities where value should be capped at or around book value, which implies the residual ~80% of BV is trading at very high premium
    • Specifically, the facilities that should be capped at or around Book Value:  
      • (i) Facilities that automatically revert to counterparties at the end of the lease (1 facility, 1,500 beds, $18m revenue; $1m book value) 
      • (ii) Facilities where counter-parties have the option to acquire the facility at or below book value (7 facilities, 11,336 beds, $368m book value); and 
      • (iii) Facilities that are currently idle (9 Facilities, 9,547 beds, $108m Book Value); 
    The Company's 10-K has details of each of facilities above. 


     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Messages


    Subject?s
    Entry06/20/2016 01:04 PM
    Membertharp05

    Thanks. Have looked at this and also agree with idea.  Surprised how well it's held up given headline risk and deteriorating fundamentals.  Is there any catalyst you see that changes the perception?  Also do you have an opinion on immigration reform, or lack thereof, being a growth driver?

    What do you think it's worth, and how do you view being short a decent dividend payer relative to the timing of thesis playing out?


    SubjectRe: What do you think is fair value for the equity? (EOM)
    Entry06/22/2016 05:14 AM
    Membervalue_31

    The market prices the stock on a dividend yield.  Dividend cut will be the driver that takes the stocks lower (think energy MLPs as a case study).  The company is banking on H2 growth to justify the current dividend (on their flawed AFFO metric - per above) and is also aggressively making acquisitions to obfuscate organic shrinking.  This is resulting in higher leverage.  

    If the structural decline thesis is correct the dividend will look increasingly unsustainable over the next 12-24 months. I see 30-50% downside over a 2 year horizon. 


    SubjectMother Jones: My four months as a private prison guard
    Entry06/24/2016 04:36 PM
    Membermrmgr

    Certainly doesn't cast CXW in a good light...

     

    http://www.motherjones.com/politics/2016/06/cca-private-prisons-corrections-corporation-inmates-investigation-bauer


    SubjectRe: GEO?
    Entry06/29/2016 08:35 AM
    Membervalue_31

    I think both are shorts for similar reasons.  Be aware GEO has a lot of financial leverage which will magnify moves. 


    SubjectRe: Concerns
    Entry06/29/2016 08:46 AM
    Membervalue_31

    Thanks.  My thoughts on each: 

    1) I understand your argument but I would highlight the bigger trend which is going the other way (and is already coming through the numbers).  I'd also re-highlight the terms of the Oklahoma lease (which don't suggest a strong market)

    2) This is the argument the industry makes.  There are others that make the opposite argument.  FWIW: (i) I don't think private operators have a lower cost of capital than their customers & I don't think they run facilities that much leaner (you are limited on what you can do on that front); but (ii) I have sympathy with the view that this is a way of 'capitalizing' expenditure and pushing it into the future through annual (rather than upfront) payments.  The politics of 'make it someone else's problem' (in the future) can be powerful.  Having said all of that the data tells us penetration rates are not going up (as incarceration rates have been falling) vs the opposit when they were rising

    3) I agree with this.  Trump is good for prison stock prices.  What the reality ends up looking like is not as certain (will rhetoric match reality?) but it's pretty clear in my mind that the initial reaction will be for prices to rise and perhaps significantly.  Having said that, Hillary is prbably bad for provate prisons.  Her policies in this regard are not private prison friendly (case study: Hillary comments late last year & stock price performances on the back of that)  


    SubjectFuture of Family Detention?
    Entry07/11/2016 10:44 AM
    Memberconway968

    Value_31,

    Was curious to get your take on the decision from the 9th Circuit Court of Appeals last week (Flores v US gov’t; No. 15-56434), which ruled that ICE is not permitted to detain accompanied minors? Doesn’t this obviate the intended purpose of CXW’s South Texas “Family Residential” Center? Any sense of how much cash flow could be at risk?  My rough math was in the $80m zip code and thus it seemed potentially quite problematic if they have to permanently change the use/scope of the facility. Interested to get your thoughts.

    -conway


    SubjectRe: Future of Family Detention?
    Entry07/14/2016 07:09 AM
    Membervalue_31

    The company doesn't disclose profitability of this contract but I think your $80m is about right.  The per-diem in these facilities is significantly higher than average (>$300/man/day vs. <$75/day for the rest of the owned segment exc. this facility).  LTM revenue at the STFRC was ~$280m & the company has said that margins are in-line with the rest of the owned business.  These facilities were constructed specifically to process families.  If children cannot be detained then it's a very expensive solution to process adults only.  So it seems likely that either the facilities get shut down or rates get renegotiated (down).  

    Two caveats: (1) the district court decision was more favourable than the appeal.  The original decision also provided for the realease of parents.  The appeal overturned that bit; (2) there are still further appeals available to ICE (full bench of the 9th circuit & supreme court). 


    SubjectRe: Re: Future of Family Detention?
    Entry08/04/2016 03:24 PM
    Memberconway968

    Any updated thoughts on South Texas? I was a bit surprised to see how quickly the government is moving to recut the deal w/ CXW for the South Texas facility. Seems they want to really narrow the scope of the facility and chip price on the contract regardless of the appeal strategy. Maybe they just feel that detaining children is the wrong thing to do and they don't want to continue to fight it. Either way it seems like there is a lot of cash flow at risk.


    Subjectwow...this looks like the coup de grace
    Entry08/08/2016 01:08 PM
    Memberima

    http://seekingalpha.com/article/3995939-corrections-corporation-america-likely-lose-key-contract-worth-16-percent-revenue-35-percent


    Subjectexcerpts from the "House Appropriations Subcommittee on Homeland Security Hearing"
    Entry08/09/2016 10:23 AM
    Memberima

    The hearing was on 3/17/16. Saldana is the Director of ICE. Most relevant parts below. Full piece attached. Graphs of apprehensions below hearing text.

     

    ROYBAL-ALLARD:

    The F.Y. '17 budget proposes funding for 960 family detention beds, which is a significant reduction from the 2,760 family beds funded for the current year. And I saw that last week you published a request for information for facilities and services provided in an innovative manner and which do not resemble traditional correct practices.

     

    What are ICE's plans for consolidating its family detention facilities? And depending on what you get back from the RFI, is it possible that ICE will stop using Karnes and Dilley as -- for families in F.Y. '17?

     

    SALDANA:

    Well, we're pretty much there on the decision on Karnes. We are probably going to convert that into -- our plans are to convert that into an adult male -- perhaps with children -- facility, not family facility, as it now with -- with largely women.

     

    Dilley will continue to exist. We will continue working there.

     

    And although with respect to Berks, the jury is still out. Our license continues there, but the jury is still out as to whether we will be able to win that challenge to -- that's being made right now with respect to our license at Berks.

     

    So this is such a -- an answer that is determined by so many different factors, not the least of which is what's going to be -- what's happening on the border tomorrow or the month after. I know we - - we all recognize the fact that there's a -- there's a season for migration and then there is times when it's a little slower, but that's currently our -- our plan.

     

     

    FLEISCHMANN:

    Good to see you today.

     

    I have some questions for you regarding the family detention beds.

     

    The cost of beds for family units was $342.73 in fiscal '16. Yet the budget requested a drop in the average cost to $161.36. In addition, the request projects a decrease in the number of beds by 1,800 beds.

     

    While I applaud the effort to cut costs in this current fiscal climate, I am concerned as to whether this estimate is achievable. I have three questions.

     

    First, why does the request drop the number of beds so dramatically?

     

    SALDANA:

    As I tried to say earlier and I may not have been clear enough, this -- this was our number back at a time when actually our -- our -- the actions we had taken in enforcement were working, the government of Mexico was helping us with respect to stopping people at our southern border. This were looking fairly steady and even declining, so we based that number on that. That's -- that's why we did that.

     

    But again, I -- I am all -- I am going to be all over this. I will be looking at that very, very frequently.

     

    FLEISCHMANN:

    OK. So then you would agree with me the situation has changed to make that number not feasible?

     

    SALDANA:

    It -- it has changed, sir, and obviously that's -- that's part of what you're going to be doing with respect to looking at that request, I'm sure.

     

    FLEISCHMANN:

    I understand.

     

    Did you consult with industry in developing the cost estimate? If not, how did you develop it and

    how confident are you that the bed cost can -- can be reduced so significantly?

     

    SALDANA:

    Well, we have -- we have quite a few people who are experts who have been doing this for 20 and

    30 years. I cannot answer your question as to whether there was a specific private consultant we

    used. We certainly use private sources for consultation. In the end the decision is ours.

     

    But let me just point out to you, you may remember that when we had that tremendous influx in

    2014 we had to stand up Dilley and turn that on a dime, and as a result we paid dearly for those

    demands that we made to get the housing in shape, get it available. And we have just released that

    request for information with respect to trying to get facts that'll help us decide how we're going to

    save this money.

     

    But we really do anticipate, since we had a lot of front-end costs in the Dilley stand-up, that we

     

    will be saving that money and -- and target it -- this number for you.


    SubjectRe: excerpts from the "House Appropriations Subcommittee on Homeland Security Hearing"
    Entry08/09/2016 01:56 PM
    Memberconway968

    Thanks for sharing. I'm scratching my head to think how (or why) ICE would pay more than this new budget amount. In the event that CXW balked at the revised terms, do you have any sense of which ICE assets could be used as processing facilities as an alternative? Presumably they could just give them notice of cancellation with the idea to use Karnes as a stop-gap and/or in-house federal ICE beds. Not ideal, but probably enough of a credible option for ICE to present revised terms on a "take-it-or-leave" basis. 


    SubjectMore bad news for CXW
    Entry08/09/2016 05:24 PM
    Memberka8104

    value_31, good call here, did bunch of work after your post.  Think best part is that as you pointed out, the core business has been in decline with inmate population / occupancy down materially and the only way they plugged the earnings hole was with the quick to sign the well-above-market South Texas contract which is 20%+ of EBITDA but now at risk.

    Couple more thoughts to add:

    1.  South TX situation pretty well covered by SA article mentioned below and on the company's conf call last week.  Seems like the best case now is the per diem gets cut in half to $150 and they keep all their beds, under this scenario EBITDA is down by 10%+ which is what at least one sell side firm hit numbers by.  In this scenario, the dividend is tight but if its worse and they lose the whole thing which seems increasing probable, the dividend cannot be covered.

    2.  Good article http://www.expressnews.com/news/local/article/ICE-still-on-the-hunt-for-new-family-detention-9128042.php#photo-10722577

     

    3.  BOP:  the company out of nowhere lost a large facility (Cibola) at renewal, this was a surprise and was disclosed on earnings release and is another 3% earnings hit.   As highlighted on the call, the Bureau of Prisons has actively reduced their prisoner population over the past few years; Congress getting rid of mandatory minimums can push this even further; more BOP contracts are up for renewal in 2017

    4.  California:  driver of abovementioned prisoner population declines was Prop 47 which reduced drug sentencing, as the state is under court ruling to get population down and in-state operations are legally and politically favored; CXW as the swing capacity out-of-state provider got hit after Prop 47 and lost 1/2 of its CA inmates; next in November, Prop 57 is up for vote that would relax parole standards and if passed could hit up to the reminader of their CA population (~5K inmates and 9-10% of revenue and maybe more of EBITDA); Prop 57 excerpts are (i) “Authorizes parole consideration for people with nonviolent convictions who complete the full sentence for their primary offense” and (ii)  “Encourages completion of rehabilitation and education programs by people with nonviolent convictions by offering the possibility of earning time off for good behavior”

    5. Looking at the holders list, looks like weak hands as is ETF heavy due to inclusion in REIT indices (probably what dragged the stock up as REITs have generally ripped with interest rates down so much) but dedicated REIT investors don't really own the prison subsector.   Is a yield stock so if dividend cut and/or loses REIT status, could be a problem.

    6.  Clinton and Trump are both bad outcomes.  Clinton is against women/child detention and private prisons and Trump cuts off immigration and no need for the centers.

     


    SubjectResponses
    Entry08/10/2016 09:27 AM
    Membervalue_31

    Firstly, apologies for not contributing sooner but I have been away for the past week.  

    Some thoughts on the various issues raised:  

    • Family Detention - I think the market is more benign about this than it should be.  Reasons include: (i) company painted a more optimistic picture of the issue on the call than reality; (ii) failure to appreciate how impactful this could be to financials.  On the second point I think this thread is more realistic about the potential impact to EBITDA/FFO than the market seems to be.  However, one thing that hasn't been mentioned is that in addition to the impact on FFO/AFFO it will also push the company above it's leverage target limiting its ability to keep making acquisitions (which has been the primary tool to obfuscate the poor organic performance of the business); 
    • ka8104 mentioned this but the BOP contract loss is also material.  That facility had occupancy of 98% in Q2'16 (or ~1,100 paying beds).  (i) It's further evidence of the challenging structural trends I wrote about in the write-up; (ii) don't underestimate the risk around Criminal Alien Requirement 16 (CAR-16) (which is a Q3'16 / Q4'16 event); and (iii) BOP populations continue to fall (I track this site farily regularly: https://www.bop.gov/about/statistics/population_statistics.jsp#old_pops)   
    • California - you can track population (including out-of-state) here: http://www.cdcr.ca.gov/Reports_Research/Offender_Information_Services_Branch/Population_Reports.html.   Populations continue to decline (obviously Prop 57 would make this worse)
    • Re: the Clinton v. Trump Questions. The Democratic Party Position on Private Prisons has been made clear: (http://www.presidency.ucsb.edu/papers_pdf/117717.pdf)
      • "Democrats are committed to reforming our criminal justice system and ending mass incarceration. Something is profoundly wrong when almost a quarter of the world’s prison population is in the United States, even though our country has less than five percent of the world’s population. We will reform mandatory minimum sentences and close private prisons and detention centers. Research and evidence, rather than slogans and sound bites, must guide criminal justice policies."  
      • "We will fight to end federal, state, and municipal contracts with for-profit private prisons and private detention centers. In order to end family detention, we will ensure humane alternatives for those who pose no public threat"

    SubjectHighly critical front page Washington Post article re: TX detention
    Entry08/15/2016 09:03 AM
    Memberka8104

    Washington Post:  Inside the administration’s $1 billion deal to detain Central American asylum seekers


    SubjectRe: it just keeps coming--OIG report finds private prisons underperform
    Entry08/15/2016 01:09 PM
    Memberka8104

    Here is another related article talking CXW facility called Adams, sounds as bad as Cibola.  This contract is up June 2017 with 2,000 beds.

    https://www.thenation.com/article/federal-officials-ignored-years-of-internal-warnings-about-deaths-at-private-prisons/

     

    Upcoming contracts 2H16:

    Houston – ICE – rebid announced this year – 1,000 beds (GEO publicly stated that actively bidding here too)

    Eden – BOP – rebid announced this year – 1,500 beds

    McRae – BOP – November – 2,000 beds

    Leavenworth – USMS – December – 1,000 beds

    Northeast Ohio – USMS – December – 500 beds (down from 2,000 few quarters ago per 8K quarterly supplementals)

     

    Contracts up in 2017:

    Adams – BOP – June – 2,000 beds

    Crossroads – Montana – June – 700 beds 

    West Tennessee – USMS – Sept – 600 beds 

    Webb – USMS – Nov – 500 beds 

    DC  - District of Columbia – 500 beds (believe already lost)

     

     


    SubjectGOOD FOR YOU
    Entry08/18/2016 12:07 PM
    Membertharp05

    Not sure how a state makes the long-term case for using them after this Federal announcement.  I know you talked about the limited asset value as there is no real alternative use for these facilities in the middle of nowhere.  Do you view this as runoff of the existing contracts, plus some cushion for the states that continue with private prisons at this point or is there another way you're looking at it?


    SubjectIs this a zero?
    Entry08/18/2016 12:27 PM
    Memberagape1095

    Great call Value_31.

    In light of the DOJ news, do you think CXW is zero or is there some equity value left?


    SubjectRe: Re: GOOD FOR YOU
    Entry08/18/2016 02:26 PM
    Memberka8104

    Well done value_31!  All BOP contracts for CXW are up in 2017.   Hard to see how ICE after this gives them a good contract if at all on South Texas renewal now.  Plus California already moving away from private prisons.  


    SubjectRe: Re: Re: GOOD FOR YOU
    Entry08/18/2016 02:28 PM
    Memberka8104

    Also wondering if they get booted from the REIT indices as REIT Index ETFs own 25% of the stock....


    SubjectRe: Re: Re: GOOD FOR YOU
    Entry08/18/2016 02:57 PM
    Memberjriz1021

    The 10k says 40% federal but it's split between Bureau of Prison, ICE, and US Marshalls.  There is a bar chart in the 10-K that gives the split.  

    It doesn't seem to look cheap here by my quick math.  I know the sell-side is trying to defend the "only" 10% of revenue.  No idea if that revenue is higher or lower margin than corporate average, but seems pretty safe to say that it's 50% incremental margins lost (vs. 30% corporate average).  The 10-K seems to indicate 70% fixed cost, so 50% could be conservative. 

    $1,857 mm revenue at 11% is $204 mm of revenue.  50% incremental is $102 mm EBITDA impact.  Using consensus next year of 470, that puts me at ~360 of EBITDA.  Company seems to indicate maintenance capex of 60, so let's use that and call EBITDA-X of 300.  

    EV as I write this is around ~$3.4 billion vs. 300 EBITDA-X?  Doesn't seem cheap to me...not to mention all the risk on losing additional contracts as a follow-on to this.  

     

     


    SubjectRe: Re: Re: Re: Re: GOOD FOR YOU
    Entry08/18/2016 04:00 PM
    Memberci230

    WMT could buy them and cut out the middle men:

    https://www.bloomberg.com/features/2016-walmart-crime/


    SubjectRe: Re: Re: Re: Re: Re: GOOD FOR YOU
    Entry08/18/2016 04:36 PM
    Memberconway968

    moris/jriz,

    Believe the math could be much worse than the 300 EBITDA - Capex you put forward. You are bridging from consensus which does not properly capture the run rate impact of the ICE contract getting restruck materially lower for the family detention center in South Texas. This contract is huge for them...more commentary earlier in the thread. The US Marshals biz at risk in light of this news (also under DOJ; c 15% of revs) as well as other states clients, particularly CA where they have material exposure.

    -conway


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: GOOD FOR YOU
    Entry08/18/2016 05:24 PM
    Memberka8104

    Agree sell side math wrong:  

    - Canacord already hit their numbers before today assuming they lose 1/2 of Dilley TX detention facility which gets to $385M EBITDA 

    - BOP EBITDA hit from today's announcement is $50-$70M more plus they are reportedly likely to shortly lose ICE Houston facility which is another $10M; offset by some growth from projects in process gets to ~$325M EBITDA; if Dilley recontracted value is even worse could be another $20-$40M additional hit to $285-$305M

    - Even at $325M, would be 11x EBITDA at today's closing and 4.5x levered and AFFO (which is a BS number anyway as understates capex) would go sub $1.80 which would require a 30-40% dividend cut assuming constant payout ratio; if they lose all of Dilley TX would be 12.5x EBITDA and 5.1x levered and AFFO is <$1.50 per share

    - Note that the leverage covenant in their bank debt is 5x

    - Even if $325M is a new base EBITDA, there is no growth opportunity and still risk from CA Prop 57 and for the States, ICE and USMS to follow the Fed's lead to move away; does this sector slowly die like for-profit education? 

    - REIT dedicated funds are unlikely to ever touch these compaines now, there is no natural owner, orphaned sector, who is buying besides covering short?


    SubjectIs this a Short?
    Entry08/19/2016 02:40 PM
    Memberthecafe

    We seem to be agreeing around an EBITDA number of $300mm (I think this is actually conservative). At a 10.5x multiple I get to about 25% downside. This igonres further downside from ICE contract non-renewal outside of South Texas and Houston, California. Then layer on the potential multiple derate from change of REIT status. And a high op. leverage business with occupancy in massive decline. Plus at that level of EBITDA the 5x leverage covenant limits draws on the revolver to fund any future cash burn, dividend payments. I've heard the argument that there may not be government capacity for all these private prisoners coming online, but I'm not sure the statistics support that with over prisoner population declining. Thoughts?


    SubjectRe: Re: Is this a Short?
    Entry08/19/2016 07:19 PM
    Memberthecafe

    This is in the context of where it has traded over the last few years. I think it would be hard to justify a much higher multiple than that given the secular trends, high maintenance capex and permanent regulatory risk. As far as the REIT status, cash flow and liquidity look tight (only $70mm of cash and lev. covenant limiting RCF) making it tough to sustainably pay a dividend. Not sure who's going to put in equity at this point.


    SubjectSome Thoughts
    Entry08/22/2016 05:48 AM
    Membervalue_31
    • Both CXW & GEO (CXW's main competitor) did update calls on Friday where there was a strong attempt to minimise the impact of the new DOJ policy
      • It's hard to reconcile the companies' statements & tone with reality
        • For example the CAR-16 RFP has gone from 10,800 beds to 3,600 beds.  Neither company disputes this but both think all their facilities will be fine (which is not possible)
        • The new policy is requiring that all contract renewals are 2-year (vs. 5-year previously) - this telegraphs the likely future trajectory (i.e. In the event there are renewals the DOJ wants flexibility to run-off those contracts if populations continue to shrink as forecasted)  
    • GEO announced before market open that the BOP renewed a contract at its D Ray James facility.  A couple of hours later GEO was forced to announce in a second statement “the Federal Bureau of Prisons (the “BOP”) has rescinded its previously granted contract modification extending GEO’s contract to operate the company-owned D. Ray James Correctional Facility”.  On its call GEO's CEO further explained: “They were not clear as to what the reasonings are. The way it's been left is we have a written commitment of interest to extend the contract. The option was to accept all terms and conditions as they were. It looks like the BOP would like to discuss the terms and conditions of the extension, and that's all we know at this time."
      • The materiality of this action can't be minimised.  BOP is willing to rescind & renegotiate contracts (note: my understanding is that all contracts can be terminated unilaterally by the customer)  
    • Both companies (& the sell side) are suggesting this issue is limited to the BOP.  I think there are good reasons this is not the case
      • Populations in the US Marshals Service and the BOP correlate with each other - i.e. the USMS is responsible for managing federal prisoners during criminal proceedings until their acquital or conviction and transfer to the BOP
      • The USMS & BOP are both within the remit of the DOJ (thus policy is the same).  ICE is Homeland security (still executive branch policy but different population drivers)
      • USMS: A Government Accountability Office Report from May 2016 regarding the USMS is worth a look (see here: http://www.gao.gov/assets/680/677380.pdf).  Some highlights: 
        • USMS populations fell from 61,469 in 2010 to 51,760 in 2015 (see Figure 5)
        • From page 33: 
          • "USMS’s Policy Directive 9.2 establishes how USMS districts will house prisoners in different types of facilities. Specifically, it states that districts must first use a BOP federal facility where there is space available, as USMS does not have to pay for these spaces. In 2007, USMS signed a memorandum of understanding in which BOP allocated a certain amount of bed space to USMS prisoners at more than a dozen of its federal facilities. In fiscal year 2015, BOP housed approximately 10,000, or 19 percent, of USMS’s prisoners in BOP facilities. Next, USMS districts must, according to the directive, use space available in state and local facilities for which USMS has established IGAs and a per diem amount to pay for each prisoner. Third, the guidance directs districts to use private facilities. In addition to this guidance, however, POD officials noted that they guide districts to consider private facilities with space where USMS has a “guaranteed minimum” number of spaces it is paying for, before the districts consider state and local facilities (the IGAs). This is because, if USMS exceeds the guaranteed minimum in the contract, the contractor provides a dramatically reduced per diem cost per detainee above the guaranteed minimum contract amount. The officials noted that fewer than 30 of USMS’s districts use private facilities, and that private facilities account for the smallest percentage of facilities that USMS uses to house its prisoners. Our analysis confirmed this assessment, finding that there were only 21 districts using private facilities from fiscal years 2010 through 2015 to house at least a half of 1 ADP during each fiscal year. However, our analysis of USMS detention data also found that some districts appeared to select private detention space over less costly federal spaces, in seeming contradiction with USMS guidance. For example, several districts that have access to one federal facility place a large number of prisoners in other private facilities at a higher cost to their districts."
        • From Page 54: Table 8 shows since 2010 private population have falled by 5% bu cost (paid to private operators) increased by $50m (+15%)
          • This is driven by minimum guarantees & is not sustainable with falling populations.  The bulls point to minimum guarantees as a positive.  Realistically, they are positive until the contract comes up for renewal at which point things get resized
      • ICE: In the FY17 Budget Justification, Homeland Security was forecasting populations to decline by 3,127 beds (o/w 1,800 are family detention).  See page 53 here: https://www.dhs.gov/sites/default/files/publications/FY%202017%20Congressional%20Budget%20Justification%20-%20Volume%202_1.pdf  
    • CXW was at pains to stress in the call that it's dividend was secure.  As I highlighted in the write-up CXW's dividend is not covered by 'true' cash flow.  AFFO materially understates capex
    • I highlighted this in the write-up but don't forget: (i) unilateral termination rights that exist in these contracts (think of what's happening with the CXW's South Texas Family Residential Center & GEO's D Ray James Facility) and (ii) the options counter-parties have to repurchase the facilities (point (8) in the write-up). 

    In summary, I don't think we have reached the end-game yet.  CXW has material exposure to federal counter-parties and I think it's unlikely this is limited to the BOP. 


    SubjectRe: Some Thoughts
    Entry08/22/2016 08:45 AM
    Memberima

    http://www.newsweek.com/unconstitutional-jail-poor-cant-pay-bail-492144

     

    This issue was featured in  one of the shows by John Oliver. Looks like President Obama is keen to fix the issues with the current legal system that results on such a high incarceration rate in the US.


    SubjectBernie Sanders writes to Department of Homeland Security: phase out ICE contracts with private priso
    Entry08/23/2016 04:45 AM
    Membervalue_31

    http://www.sanders.senate.gov/download/letter-to-dhs-regarding-private-prisons?inline=file 

    The conclusion: 

    "Given the impact on detainees, the high cost to taxpayers and the Department of Justice's recent decision, we believe the Department of Homeland Security can and should immediately begin phasing out for-profit, privately run immigration detention facilities.  As each contract comes to the end of its term, the department should either decline to renew the contract or substantially reduce its scope"

     


    SubjectBloomberg: Clinton likely act “within the first 100 days” to further eliminate federal use of priva
    Entry08/23/2016 09:47 AM
    Memberka8104

    (Bloomberg) -- If Hillary Clinton becomes president, she
    will likely act “within the first 100 days” to further
    eliminate federal use of private prisons, Beacon Policy Advisors
    say in e-mailed report.

    * Clinton will probably seek to terminate DHS and U.S.
    Marshals Service contracts with private companies
    * “Clinton has called for the closure of privately-operated
    Immigration and Customs Enforcement detention centers on the
    basis that they are inhumane and unlawful,”
    * “Clinton’s detention center agenda is largely a
    political attempt to appeal to immigrant demographic
    groups, specifically Latinos and her progressive base”
    * U.S. Marshals Service and immigration detention centers
    accounted for 40% of CXW’s revenue in 2015 and for 30% of
    GEO’s revenue in 2015, Beacon says
    * Earlier: Democrats Sanders, Grijalva Ask DHS to End Private
    Prison Use


    SubjectInspector General / DOJ investigating CXW large US Marshal Service facility
    Entry08/24/2016 10:26 AM
    Memberka8104

    https://oig.justice.gov/ongoing/usms.htm

    https://oig.justice.gov/ongoing/

    This is the same unit of the DOJ that put out the negative report for the BOP, ~2 weeks after which led to the decision to discontinue use of private prison operators.  The US Marshal Service (USMS) is a federal unit as well and is undergoing the same scruitiny.  ICE (Immigration and Customs) is also federal and reports to Dept. Homeland Security.    

    This is yet another seeming existential risk, the company's exposure to USMS (15% of revs) is even higher than BOP (9% of revs)... ICE is 28% of revs.


    SubjectHomeland Security Establishing a Review Of Privatized Immigration Detention
    Entry08/29/2016 01:32 PM
    Membervalue_31

    https://www.dhs.gov/news/2016/08/29/statement-secretary-jeh-c-johnson-establishing-review-privatized-immigration


    SubjectCalifornia Nearing Private Prisons Closures: Beacon Policy
    Entry09/06/2016 10:05 AM
    Memberka8104
    California Nearing Private Prisons Closures: Beacon Policy
    By Kasia Klimasinska
    (Bloomberg) -- Calif. bill prohibiting cities and counties from signing or renewing private prison contracts for federal immigrant detention centers may be passed by state senate this week, Beacon Policy Advisors say in e-mailed note.
    • If signed into law, it may hurt CXW, GEO, which run federal immigration detention centers in Calif.
    • Separately, DHS may decide to end immigration and customs enforcement contracts with CXW, GEO while President Obama is still in office, if its report on those facilities, due Nov. 30, is negative
      • “Otherwise, a negative report would also tee up a newly-elected Hillary Clinton to make ending these contracts a ‘down-payment’ on larger immigration reform in her first 100 days in office”
    • Earlier: Homeland Dept Studies Ending Private Prison Use for Immigration

    SubjectCorrections Corp, GEO Face Govt Decline, Democrat Attack: Beacon: Bloomberg
    Entry09/13/2016 01:12 PM
    Memberka8104

    Corrections Corp, GEO Face Govt Decline, Democrat Attack: Beacon

    By Felice Maranz
    (Bloomberg) -- Corrections Corp., GEO federal contracts,
    (~half of each co.’s rev.) likely headed for long-term runoff,
    as opportunities for growth in traditional govt contracting
    business are in “dramatic decline,” Beacon Policy Advisors
    writes in note citing DHS Scty Jeh Johnson order to review
    privatized immigration detention.

    * Federal govt’s posture towards private prison industry
    unlikely to become “friendlier” if Hillary Clinton wins,
    Democrats retake Senate (Beacon’s base case prediction);
    Democratic-led Senate would attack GEO, CXW “from all
    angles,” may strip REIT status, urge White House to extend
    DOJ order across all agencies
    * DHS decision to cut ties with private prisons may come
    sooner than Beacon had previously est. as Obama can win
    “easy legacy points” for starting process of cutting
    ICE’s private prison contracts
    * CXW, GEO can’t “escape” being increasingly branded as
    inhumane, costly alternatives to public services (as per
    Blackwater post-Iraq scandals); need to retool portfolios;
    already seek alternatives, boosting community-based reentry
    facilities, real-estate, overseas ops


    SubjectBad sign...
    Entry09/19/2016 09:22 AM
    Memberka8104

     

    https://www.americanprogress.org/issues/immigration/news/2016/09/14/144160/how-the-u-s-department-of-homeland-security-can-end-its-reliance-on-private-prisons/


    SubjectLetter released from high ranking Democratic Senators (link)
    Entry09/26/2016 05:21 PM
    Memberka8104

    https://www.leahy.senate.gov/imo/media/doc/9-26-16%20Senators%20to%20Johnson%20on%20private%20prisons.pdf


    SubjectSTFDC
    Entry10/17/2016 06:20 PM
    Memberthecafe

    Thoughts on the renewal? Based on guidance it looks like the rate was cut roughly in half and notice period for contract cancellation was reduced from 90 to 60 days


    SubjectRe: STFDC
    Entry10/18/2016 06:25 AM
    Membervalue_31

    On my numbers, I think the loss of operating income from the STFDC was ~70% vs. the original contract (recall CXW announced $9m of G&A savings in a Sep press release & this will be included in 2017 guidance - so when looking at the delta I think the rebased EPS is the one to look at).

    Also, my reading of the release is that the company is not including any further contract losses in its guidance.  If the BOP follows through then the 2017 guidance as currently stated will likely prove optimistic.  CXW has three facilities currently contracted to BOP with contracts expiring before YE 2017 (McRae, Eden & Adams - combined current population just under 5k)  


    SubjectRe: Re: STFDC
    Entry10/18/2016 08:46 AM
    Memberthecafe

    Agreed. So, it sounds like you're still involved here. Where do you think the incremental downside at this price comes from? Prop57, the rest of ICE contracts, and maybe USMS at some point? Are you concerned at all that this renewal has some read-through to what DHS ultimately decides to do with private contracts? Why did ICE renew this contract directly in the face  of their report coming out Nov. 30 and not just wait?


    SubjectRe: Re: Re: STFDC
    Entry10/18/2016 09:08 AM
    Membervalue_31

    The contract is terminable with 60 days notice.  The way this is structured is more like an option (in favour of ICE) than a contract imho.  CXW will point to a "5 year contract" and the bulls will point to the contract being renewed as positives.  While that might be right I think contract structure is very important.  

    In a similar way GEO was touting the recent renewal of the D Ray James Facility with the BOP.  The renewal term was 2 years (previous contracts were 4-5 years) and there are already 11k beds to be renewed in 2017 (i.e. there is plenty of flexibility in 2017 already).  fwiw, of the contracts that are maturing in 2017 4 out of 6 contracts are currently operating below minimum guarantee levels and the the BOP population is currently falling at just under 1k per month.  

    Contract structure & population trends are very important, I think.   


    SubjectRe: is this still a short with Trump?
    Entry11/10/2016 06:28 AM
    Memberthecafe

    Personally think there's a good argument to be made on the long side. Trump is pro private prisons and increased incarcerations for non-violent crimes. He's even more pro ICE who endorsed him during his campaign and his immigrant deportation policy would require a significant increase in detention. The Company is in an arguably better position than they were in July pre-DOJ memo when the stock was $30-35/sh. With the offsets being Prop57 was passed so CA faces headwinds still and STFRC economics were significantly reduced. Curious to hear other thoughts.


    SubjectNewt
    Entry11/10/2016 10:08 AM
    Membertharp05

    Newt Gingrich has been a longtime advocate for prison reform, so could potentially still be a negative outcome.  A google search will pop up plenty of relevant articles on his and other conservative views, this is just one:

    https://news.vice.com/article/unlikely-bedfellows-from-cory-booker-to-newt-gingrich-unite-in-dc-to-reform-prisons

     

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