Private Correctional Companies Well-Positioned for Industry Shifts

By Jane Cotroneo, Analyst, Moody's Investors Service

Stretched budgets have prompted governments to enact changes aimed at reducing overcrowded prisons and incarceration costs. Two private correctional companies are providing a steady stream of earnings without the restrictions typical of REITs.

By Jane Cotroneo,
Analyst, Moody’s Investors Service

Stretched budgets have prompted governments to enact changes aimed at reducing overcrowded prisons and incarceration costs. New policies have lead to a decline in our nation’s prison population for the first time in three decades. According to the Bureau of Justice Statistics, the prisoner count declined modestly by 0.4 percent in 2010, the last year data is available. This follows two decades that witnessed the prison population double to 1.5 million. Similarly, demand for private correctional beds has leveled off after years of solid growth.

The two private correctional companies that Moody’s rates, Corrections Corp. of America and The Geo Group have grown significantly in the past five years through development, expansion, and industry consolidation to become the industry leaders. These companies have contractual revenues for their facilities, providing a steady stream of earnings. Moody’s has a stable outlook on both companies.

Unlike REITs, these private correctional companies are not required to pay a dividend and have fully reinvested free cash flow into growing the number of beds they contract out. In early 2012 both companies announced the initiation of a dividend. In fact, both companies are considering converting to REIT status. These companies expect free cash flow to remain available for investment. However, less investment dollars may be necessary to match what appears to be slowing demand from their governmental clients.

U.S. states spent an estimated $51 billion in 2010 on corrections expenditures. Over the years, to reduce costs and lower recidivism rates, greater attention has been placed on investing in treatment and other community programs to aid with the transition out of prison. Reevaluating sentencing guidelines and a greater emphasis on parole have also contained recent prison population growth.

Despite these changes, public facilities remain overcrowded with nearly half the states still reporting prison population growth, and federal prisons are at 136 percent of capacity. Moody’s expects governments will continue to rely on U.S. private correctional companies to alleviate overcrowding at their own facilities.

Growth has strengthened the credit metrics of Moody’s-rated private correctional companies, providing adequate cushion to withstand modest occupancy declines should they materialize. Other ongoing credit concerns inherent in the industry center on the limited re-use possibilities for prisons, the limited number of government clients, the short-term nature of most contracts, and the industry’s vulnerability to shifts in public opinion.