Corrections Corporation of America (CCA)’s potential Real Estate Investment Trust (REIT) conversion is not its first foray into this form: The last round resulted in prison speculation and huge financial losses for outsider investors.
Last spring, the nation’s largest private prison owner and operator, Corrections Corporation of America (CCA), announced its plan to assess the feasibility of a Real Estate Investment Trust (REIT) conversion.
Over the last quarter, Tennessee-based CCA publicized its potential REIT conversion as a way to “increase long-term shareholder value” by reducing both its federal and state corporate tax liability to zero. In exchange for such a handsome tax rate, CCA must meet REIT guidelines by distributing at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Although an REIT conversion would likely benefit CCA’s shareholders – 7 percent of whom are insiders – it would undoubtedly harm small communities, and states in some cases, that rely on CCA for tax revenues. By converting the company to an REIT, CCA insiders would not only slash their company’s effective tax rate from 37.2 percent (equivalent to about $92 million in 2011) to zero, but would actually pay themselves an additional $7 million next year. And so long as Republicans and Democrats can agree on a tax-cut extension before December, that $7 million would be subject to a tax rate of 15 percent.
Despite vaunting its commitment to public safety and community partnership, CCA’s interest in an REIT conversion demonstrates that the communities in which CCA does business are wholly subordinate to the enrichment of its management.
And what’s even more astonishing is that CCA has been here before.
Fifteen years ago, CCA bet that an REIT conversion would produce enough surplus cash on hand necessary for its ambitious expansion plans. To this end, CCA Prison Realty Trust, an REIT registered in Maryland, went public in July 1997 and raised more than $400 million from its initial public offering (IPO). Most of the IPO proceeds were used to purchase nine facilities from CCA, which then leased them back and continued operating them under government contracts. Nine months after CCA Prison Realty Trust was established, it and CCA announced a plan under which the REIT would acquire CCA, the management company.
By operating as a subsidiary of the REIT, CCA could be controlled by insiders and freed from the direct obligation of reporting quarterly earnings growth, while CCA Prison Realty Trust would enjoy REIT tax benefits as the owner of CCA’s prisons.
In the immediate aftermath of the merger/REIT conversion, CCA launched what then appeared to be a full-fledged prison speculation campaign. In July 1999, CCA announced plans to build a 2,000-bed, $100 million facility in California City, California, despite not having secured a contract with the state to fill the prison. CCA made similar speculative choices in Georgia and Utah months later.
It’s certainly one strategy to fulfill an unmet need; it’s another to produce one.
Predictably, CCA’s speculative binge prevented the firm from meeting its REIT dividend obligations, and CCA Prison Realty Trust soon fell into default under the terms of its $1 billion credit agreement. In June 2000, the company shed its REIT classification, and when the dust had finally settled, CCA reported that it had lost an astounding $730 million, or 85 percent of its market capitalization.
Don’t believe me? At the beginning of 2000, CCA’s shares were valued at $1. And to add insult to injury, CCA’s poor performance cost the company an additional $120 million in shareholder lawsuit settlements.
Perhaps CCA’s looming REIT conversion portends a return to the very sort of speculative practices that nearly bankrupted the company over a decade ago.
In fact, CCA’s recent activities suggest that speculation has already begun. Just last March, CCA sent solicitation letters to 48 states offering to buy their state-operated facilities as a solution to the alleged inefficacies of state departments of corrections. In exchange for “streamlining” publicly owned prisons, CCA asked for a 20-year management contract, plus a guarantee that their prisons would remain at least 90 percent full. (Read the letter.)
Oddly, CCA drafted and distributed its plea just three months after the US Department of Justice (DOJ) released a report indicating that the combined US prison population had just decreased for the first time since 1972. CCA’s troubling occupancy rate requirement is itself a form of speculation, and all but guarantees higher rates of incarceration at a time when the DOJ thinks we may have just turned the corner.
Prison speculation is flatly antithetical to the most basic tenets of justice and rehabilitation, as CCA once again prioritizes shareholder equity over public safety.