One of the two prison and corrections-oriented real estate investment trusts plans to drop its REIT status, while its peer voiced its commitment to the tax designation even in an adverse political and economic climate.
On an earnings call this week, CoreCivic, Inc.'s leadership cited the company's persistent low valuation and consequent high cost of capital as a principal reason for its planned conversion to a taxable C corporation at the start of 2021. The company had suspended its dividend in June as its board weighed a decision on corporate strategy, which came on the heels of a "multiyear" discussion about a possible conversion. Management and the board also discussed the prospect of going private, according to President and CEO Damon Hininger.
"To be abundantly clear, we have not been satisfied with the trading multiple of our stock. ... It translates to a higher cost of capital, inhibiting our ability to execute our business plan," Hininger said on the Aug. 6 call.
At the start of 2013, CoreCivic, then known as Corrections Corporation of America, converted to a REIT, a tax designation that allows a company to avoid corporate-level tax if it meets strict income requirements and distributes the bulk of earnings as dividends.
In the politically charged years since, popular opinion has soured on the company and its private prison operator peer, GEO Group Inc., both of which also operate immigration detention facilities. CoreCivic responded by rebranding and building out other business lines oriented toward inmate rehabilitation and social reentry, but some banks still moved to sever their lending relationships. And some investors have abandoned the name as ESG-frameworks have grown in prominence.
In April, when the coronavirus pandemic was spreading in the U.S., Fitch Ratings cut CoreCivic's long-term issuer default rating and assigned a negative outlook to the company, citing its relatively weak access to capital.
Since Jan. 1, 2013, when both CoreCivic and GEO Group began operating as REITs, CoreCivic has returned negative 48.8%, while GEO Group has returned 7.7%, according to S&P Global Market Intelligence data. The SNL US REIT Equity index returned 76.0% over the same time frame, while the S&P 500 returned 174.3%.
Converting to a taxable C corporation will give management greater control over company finances and improve the company's credit profile, in turn lowering its cost of capital, CoreCivic's management said on the call this week. CoreCivic's first priority will be reducing leverage, but the company expects to invest in "growth opportunities" and to allocate a "substantial" part of its free cash flow to fund share repurchases and future dividends, management said.
"With our 2013 conversions, the [REIT] restructure was the right structure at the right time for CoreCivic, and it remains a great structure for many companies," Hininger said. "But we have to recognize the limitations the structure imposes on CoreCivic in this economic and political environment."
On a separate earnings call on Aug. 6, GEO Group Chairman and CEO George Zoley acknowledged investor concerns over the company's access to capital in light of "the current political rhetoric and the mischaracterization of our role as a government services provider," but said the company has "no plans" to follow in CoreCivic's footsteps and abandon REIT status. GEO Group's management conducted a "pretty thorough discussion" with the company's board about its REIT status and does not anticipate revisiting the matter in the near future, he said.
"I don't know if I can condense all of the discussions regarding that [REIT status], but I think our stock today is undervalued," Zoley said. "And following the results of the election in November, I think there will be a rebound in our stock price that will further illustrate the value of staying a REIT."
Zoley said GEO Group plans to lower its quarterly dividend to bolster its financial flexibility and pay down debt in the near term, but that the guarantee of a dividend in some form remains a major draw for investors and a priority for the company.
"I think investors would prefer to invest in a company that's paying a substantial dividend rather than a company that's not paying any dividend at all," he said.