As the state of California continues to move forward with its plan to "recall" nearly 9,500 prisoners from out-of-state private correctional facilities, it appears the process doesn't bode well for Nashville-based Corrections Corporation of America's bottom line.
According to an analysis conducted by the Private Corrections Institute, the move represents a significant loss of revenue for the nation's largest private prison company. Here's an excerpt from the release, authored by Alex Friedmann, longtime CCA critic and president of the PCI (emphasis Pith's):
CCA failed to mention that the reduction in contract beds coincided with the California Dept. of Corrections and Rehabilitation’s realignment plan which intends to phase out all 9,588 out- of-state beds within 4 years. According to a CDCR report released last April, the realignment plan will “eliminate the use of all out-of-state contract facilities by 2015-16.”
The CDCR report noted that returning all California prisoners from out-of-state CCA facilities would “result in a reduction of $318 million” from the state’s general fund. The report specified that California’s out-of-state prisoner population will be reduced to 9,038 by 2012-13 – which has already occurred according to CCA’s recent press release – then to 4,969 by 2013-14; to 1,864 by 2014-15; and to 531 by 2015-16, with a complete phase out by the end of 2016.
According to CCA’s 2011 annual report, California accounted for 13% of the company’s total revenue last year; thus, the loss of 9,588 contract beds to house California state prisoners will represent a significant decrease in revenue for the company. As noted in CCA’s annual report, “The return of the California inmates to the state of California would have a significant adverse impact on our financial position, results of operations, and cash flows.”
This piggy-backs on a report by Daily Finance that questions the conventional wisdom of purchasing stock in private prisons, which have historically acted as dividend-generating machines for those shareholders who can stomach the nature of CCA's "product."
Citing increased media scrutiny and declining prison populations, the Daily Finance report offers an insight into the company's potential transformation into a real estate investment trust, aka REIT. Since REITs are required by law to funnel 90 percent of their taxable income to investors, it could be now is a good time to take the money and run far away from an industry facing decline for the first time in its history.
Corrections Corporation of America (NYS: CXW) and GEO Group (NYS: GEO) hold half of all prison contracts and collectively pulled in $3.3 billion in revenue for fiscal year 2011. In an industry that lives by economies of scale, CCA enjoys a net profit margin of 9% — nearly double that of GEO Group. However, both companies have seen decreases in net profit margins over the last four years, even as revenue has consistently risen. This is due in large part to decreases in prison occupancy rates. Like for Superman, less crime means less business for these companies.
As public outcry continues to grow, contracts have already begun to flutter away. More than a third of CCA's contracts and approximately half of GEO's contracts expire in 2012, creating even more opportunities for governments to make their great escape. With no growth and no competitive advantage, it's only a matter of time until financial markets follow suit. Private prisons make neither sense nor cents, so make your break today.