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  • newMK newMK Jun 8, 1999 8:35 AM Flag

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    See 2757 for 1 & 2 (tax savings, access to
    capital)

    #3: Invisibility of OPCO. When the REIT was
    announced, we were told that because OPCO would be private,
    it "could do so much more" (exactly what, I've never
    known). While I would rather have OPCO private than
    public (controlled v. independent), there will be no
    invisibility because of the recent bond terms. Of course, the
    invisibility of OPCO is what aggravated analysts so much from
    the start.

    #4: Price stabilization. When CCA
    missed earnings in Q3 1997 because of ramp up problems
    (which were quickly fixed), the stock price dropped 25%.
    We were told that because OPCO's ups and downs would
    be taken out of the picture, PZN would have stable
    prices based on predictable revenues. CCA essentially
    missed earnings again because of temporary occupancy and
    ramp up issues. Attempts to keep these issues
    invisible (without forthright disclosure) has caused a
    bigger drop in market cap (from a less lofty price) than
    the 97Q3 problems did. And again, by popular demand,
    the invisibility is gone. The only thing worse than a
    cover-up is a blown cover-up.

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    • #5: Widows, orphans and retirees. When PZN was
      first conceived, Doc thought it would be a tough sell
      to traditional REIT investors. It was suprisingly
      easy, and many growth investors scooped the IPO up (60%
      cross ownership between CCA and PZN). It was so
      successful, it led to where we are now. The growth investors
      have bailed, and traditional REIT investors want
      nothing to do with prisons. Some institutional money I
      manage, with Merrill Lynch's assistance, had the
      opportunity to buy preferred stocks around the time PZN's
      preferred stock was issued. I mentioned the 8% yield to the
      ML advisor, and he suggested big name preferreds at
      7% (Citicorp, etc.), adding "prisons are too risky".
      I didn't argue. Those preferreds are at or above
      par 15 months later. PZN preferred went from 25 to
      under 15.

      #6: Big dividends attract the money.
      PZN decided in Q1 of this year to bump the dividend
      significantly, apparently to show investors how great the stock
      was. They not only paid more operating dividend than
      required (even with the knowledge of OPCO's shortfall in
      revenues), but also began accelerating the special dividend.
      Why, oh why, was it necessary to distribute money
      before it was required? It almost worked, but retreating
      from that super dividend policy after Q2 will be
      tough, even if otherwise prudent. There is no cushion
      for maneuverability.

      • 1 Reply to newMK
      • #7: The special dividend. This should always have
        been a non-issue, because the stock will decline by
        however much is paid. It's only required for tas
        purposes, and creates more financing difficulties. But many
        retail investors think it's a great thing. Wrong. And
        wrong about the amount, too. After special charges,
        fees, etc. and dilution, it'll be about a dollar a
        share less than originally estimated.

        #8:
        Combining growth rates. Last year we were told that new PZN
        would grow at a rate equal to 80% of CCA's growth rate
        + 20% of PZN's growth rate, or roughly 30%. Oops.
        Forgot dilution. Some analysts' models now show FFO
        calculations based on issuing equity at $15 for half of next
        year's capital needs. Try 30% dilution instead of 30%
        growth.

        #9: "You're the only one for me" and "we're in the
        big time now". Bad things happen to people who
        promote themselves above their old friends and
        acquaintances. PZN has effectively stiffed its old circle of
        analysts, commercial bankers and investment bankers. There
        may have been expedient reasons for going exclusively
        with Lehman, but at crunch time PZN suddenly looked
        like damaged goods. BTW, is that Lehman credit line
        finalized?

 
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