Private Prison Builders' Flirt With Stocks Ends

NEW YORK -- It sounded like a good idea at the time - and possibly it was.


But a 1997 decision by Corrections Corp. of America, the United States' leading private builder and operator of prisons, to spin off its real-estate arm and, in effect, become a real-estate investment trust, has come to an ignominious end.


Prison Realty Trust, the once high-flying offshoot, announced a restructuring plan Monday under which it would raise up to $350 million in badly needed financing and, not incidentally, convert back to an ordinary tax-paying company.


The earlier transition to a REIT turned the popular growth stock into a dividend play for investors. REITS pay out 95 percent of their earnings to investors to avoid taxes, and their steady stream of cash appeals to those looking for income.


But Prison Realty was problematic for a host of reasons, including a complex structure and its close relationship with Corrections Corp.


Last month, Standard & Poor's put some of Prison Realty's debt on special watch with "developing implications." And the stock has tumbled 75 percent this year, to close Monday at $5.25 a share, far from its $21 offering price in July 1997.


With new management, a more transparent structure and a cash infusion from a savvy and reputable investment group, the reconstituted Corrections Corp. will have considerable potential, according to Wall Street analysts, though they are waiting for a conference call with management next week before making outright recommendations. Among their questions is how diluted the stake of existing shareholders will be because of the new investors.


"We view it as net a positive," said Brian Shepler, vice president of equity research for SunTrust Equitable Securities in Nashville, Tennessee, the company's home town.


Although private companies can build and operate prisons more efficiently than governments, they usually are at a disadvantage when financing them.


When REITS became investment darlings two years ago, Corrections Corp. saw an opportunity to raise money inexpensively. The IPO of Prison Realty Trust was greeted with enthusiasm, the proceeds were leveraged and the money was used to finance more growth in a business known for high barriers to entry (as well as to customers seeking an exit).


Before long, though, the situation turned sour. The market turned hostile to REITS, and some prisons that Prison Realty built had long delays in receiving inmates.


"It was bad financial engineering combined with a bad market combined with operating problems," Macdonald said, citing in particular a long-completed prison in California City, California, that got its first prisoners only this month.


Management lost much credibility with investors, analysts said, after making a convoluted proposal last year to remerge the two entities. Analysts found the plan not only difficult to fathom but filled with conflict, because executives were on both sides of the transaction. Lease terms between the two companies had already aroused complaint.


"That's what started the stock sliding," said Gary Boston, a PaineWebber analyst who said Monday that it was too early to tell whether the restructuring would be appealing. He wondered whether, among other things, the return on the preferred stock to be offered would be paid in cash or in stock.