The GEO Group, Inc. Message Board

COMPANIES THAT RUN PRISONS MAY BE POISED FOR A
BREAKOUT
Part 2
By Brian Edwards and Jill Ward

Chicago Tribune
Sept. 6, 2000

One of the
industry's biggest hurdles has been its need for capital.
Offender management companies historically need $2 in
capital for each $1 in revenue for privately owned
prisons, and capital has been very hard to find lately,
says analyst James Macdonald of Chicago-based

First Analysis Securities.

That's compounded by
the fact that while 80 percent of new prison projects
require private money,only 20 percent succeeded in
finding
that funding. Prison Realty Trust, along with its
parent company, Corrections Corp. of America(CCA),
controls 50 percent of the market share, but the company
is troubled.

The fiasco began in 1997,when
CCA got rid of its real estate assets through an
initial public offering of a real estate investment trust
(REIT), naming the new company CCA Prison Realty Trust.
Investors loved the business structure of REITs, and the
stock did very well. But CCA stock plummeted, and
management decided to buy back the new company. Activist
investor groups cried conflict of interest, turning the
situation into the corporate equivalent of a prison
riot.

Restructuring is ongoing at Prison Realty. In
June, the company announced it plans to merge CCA into
a wholly owned subsidiary of Prison Realty Trust
and drop its REIT status. Macdonald rates the stock
as a "hold," noting that lingering questions have
cast a shadow
over Prison Realty Trust's
future.
>
> The outlook for Wackenhut is
better, according to Macdonald, but the company's
long-standing clean record was recently marred due to bad press
over several inmate killings and other problems in New
Mexico. To neutralize these problems, Wackenhut has been
spending to improve operations. This, combined with higher
insurance costs, has reduced earnings, which are expected
to be flat in 2000. Still, Macdonald rates it as a
"strong buy."

"Wackenhut has very good management
and the most financial flexibility," Macdonald said.
"It's a very conservatively run facility, and I expect
very good growth."

Cornell Companies, which
seemed to have weathered 1999 better than the rest of
the companies, still faces problems. The company is
fully leveraged with debt, and the shortage of capital
has slowed its acquisition strategy.

However,
Macdonald noted Cornell holds a $200 million portfolio of
real estate that may support a sale-leaseback
transaction, where it
could raise capital by selling its
owned property to other buyers who would then lease the
property back to Cornell. Cornell also recently signed a
three-year management contract in New Mexico.

>
Macdonald says that Cornell has good management and is
smaller, so it can grow faster. He likes the fact that the
company operates in several different sectors -- adult,
juvenile and halfway houses -- so it can grow without
heavy capital investment. He currently rates the
company as a "strong buy."

"On the downside, it
is very highly leveraged," he said. "On the good
side, Cornell owns its own real estate and is selling
at less than the value of its properties."


Other companies involved in the corrections industry
include Correctional Properties Trust (NYSE: CPV),
Res-Care, Inc. (Nasdaq:RSCR) and Children's Comprehensive
Services, Inc. (Nasdaq: KIDS).

Correctional
Properties Trust acquires correctional and detention
facilities from both private prisons and governmental
organizations,
forming a REIT. Res-Care, Inc. has two divisions:
one that serves the disabled and one that works with
at-risk and troubled youths. Children's Comprehensive
Services and its subsidiaries work with government
organizations to provide a variety of services to troubled
youth.

Of the three, Macdonald believes the outlook for
Correctional Properties Trust is the most
favorable.