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Corrections Corporation of America Message Board

  • RetiredPaperman RetiredPaperman May 17, 1999 7:09 PM Flag

    A simple and elegant solution

    Doc, recombine PZN with Opco. The singular reason
    for creating the REIT was to enhance the entity's
    abilities to raise capital. For whatever reasons, and there
    are plenty, it isn't working as planned. That is a
    clear fact, not an opinion.

    Combining the co's
    takes away all the sideline issues that have grown into
    forefront issues. If you had done this when PZN was at 20,
    the stock would have temporarily dropped to 15 then
    climbed back. Now, such a move would most likely be
    greated with a move back to 20. HOT gave up REIT status
    and PAH toughed it out. Look at the comparative
    results. Is that a totally valid comparison to this
    situation? No, but a lesson can still be earned.

    I
    remain convinced that the initial plan made sense but
    things changed, some outside of PZN's control (Investor
    disdain for REITS) and some within PZN's control (The
    "mistake").

    It doesn't matter. That's all water under the
    bridge. Bring the company's back together before there's
    nothing left to merge.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • If you put the two businesses back together
      (which is potentially the fair way to value the entity
      anyway) the system generates substantially less reported
      economics. PZN is supposed to do $300mm of FFO this year,
      and it seems if OPCO is losing $40MM in cash after
      getting paid $80mm in additional fees from PZN, OPCO is
      really losing $120mm. So take $300MM of PZN FFO and
      subtract $120mm of OPCO losses, and you get $180mm of
      combined FFO (maybe accountants can monkey with this
      number and take some expense and ammortize it, but cash
      basis is fair way to look at economics). Divide $180MM
      of FFO by 117mm shares (although share count may go
      higher if they have to buy OPCO back in??), and you get
      $1.55 of FFO.

      At $1.55 of FFO, what multiple
      does the business deserve? I suspect the multiple it
      would get would likely be a discount to peer given the
      credibility issues that have arisen at the
      company.

      What do you think of this analysis, is it a fair way
      to value the company as a system. If so, I can get
      to a number for stock price of around $10 or $11
      using a 7x FFO number, which may be appropriate for a
      tarnished story w/ legal/other clouds hanging around. JMHO.
      Any thoughts??

      • 3 Replies to tryasyoumight
      • I they want to maintain their reit status. Reits
        can only own the real estate,not operate the
        business, unless they are a paired shared reit, which PZN
        is not. And can't become one. Not allowed anymore.

      • ...that he was comfortable with analysts'
        earnings estimates for the next quarter and remainder of
        the year, and that the various fees ($4000 included)
        were included as part of Q1; if such is the case, then
        FFOPS will present no surprises for the balance of this
        year.

      • Interesting thumbmail analysis. I'm away from my
        home office so I can't do the analysis I'd like to do
        but mine would go something like this...Pre-merger,
        CCA was supposed to make something like $1.20 a share
        (adjusting down for the drop in communicated growth from 40%
        to 20%). PZN was about 1/4 the size of CCA so you
        can almost exclude them from the equation but if you
        choose to include them, it probably doesn't hurt my
        case.

        Take $1.20 and give it a pe of 25 instead of the
        previous 40+. A pe of 25 on a 20% grower would be quite
        conservative for this market. I think the S&P pe is about 28
        and growing under 10%. $1.20 x 25 is 30.

        With
        that cursury analysis done, my argument is that it
        ("it" being the numbers) doesn't matter. PZN has no
        choice. They might have pulled off the REIT if they'd
        operated flawlessly but the "mistake" is the end of the
        great experiment. Regardless of the numbers, the market
        has spoken. The stock is at $15 and going lower. IF
        the debt deal goes through, they'll still need to
        issue stock early next year and it's going to be at
        horribly low prices.

        Fortunately, they've run the
        actual operations side of the business pretty well,
        except for Youngstown. Otherwise we'd be at 10 right
        now.

        In summary, the numbers don't matter anymore.
        Credibility is zero and it can only be fixed by making the
        whole entity a public corporation. Lose the REIT
        status, PZN pays taxes at the lower corporate rate, I
        stop paying at 46%, the stock goes higher than it
        would otherwise. I'm afraid you won't find the answer
        to this one on your calculator.

    • I can't do that. But I will admit that the CC was
      disconcerting.

      I forget where it comes from, but that old saying
      comes to mind (and has in the past year): "what a
      tangled web we weave, when first we practice to
      deceive".

      I really don't believe that Doc had bad intentions
      in the course of all this. But I've been involved in
      lot of brilliant deals that circumvented tax
      prinicples while meeting the letter of the law, and I would
      never present them to the public. That's the problem
      with this REIT. It's a good idea, but it is way too
      sophisticated to play well in the market. Even if the market is
      wrong, it has passed judgment. This thing ain't gonna
      bounce back any time soon. But in another year, if they
      can survive the next two weeks, maybe people will
      finally figure it all out.

    • It is NOT a REIT problem, per se. There are
      plenty good REITs, with credibile management, that are
      doing fine job and whose stock prices are finally
      starting to move.
      What we have here is MANAGEMENT
      PROBLEM COUPLED WITH A CONVOLUTED
      STRUCTURE WITH OPCO,
      WITHOUT ANY REAL OVERSIGHT AND POTENTIAL FOR CONFLICT OF
      INTERESTS AND SELF-DEALINGS.
      So, to say, after all this,
      that REIT is our problem, is quite disingenious of
      you. I know, you are not dumb; but you seem unable to
      bring yourself to one and only one conclusion from this
      debacle: your hero, Doc, has no clothes!

    • Do you know, what is the name for a smelly fish?? Flipper!!
      Go and recalculate your yield for the umpteenth time; that is about all what you are good for!!!

    • didn't I cleonew.

      It's nothing to be
      ashamed of. Well many they PAH crap. Now THAT was smelly.
      Buys all the way to $0 because you people had money
      lend to them..shame. Nice Chinese Wall over there,
      huh?.

    • a former REIT. I haven't liked 'em for twenty or
      thirty years. A growth company has no business being a
      REIT. Somebody posted that the trouble with CCA began
      when Doc's son arrived. True - again, not because of
      bad intentions, but because the bright guy "grew up"
      in Goldman's REIT dept when REITs were enjoying the
      good wishes of a brilliant market & analysts like you
      & Litt. If you can find it, go back and read about
      HOT's decision to be taxed as a C Corp. And speaking of
      HOT, of which you have NEVER responded to polite
      requests for explanation of elegance, your buddy Barry got
      a pretty lousy review in Forbes recently. And the
      REIT bubble let a guy like him thrive.

      PZN
      never should have been set up. I said it before and
      will repeat it - Doc's first disingenuity was at last
      year's shareholders meeting when he said PZN raised $400
      million with no dilution for CCA's shareholders. B.S. - I
      calculate 20% dilution post-merger. Anyway, it came into
      being when you and others were in love with REITs. As
      Doc confessed, it was so easy to raise money that
      way, why not go whole hog. Now all you REIT lovers
      have turned on him and he's got his otherwise
      brilliant self tangled up in the complexities.

      RP's
      got it right. Merge with OPCO, get some mortgages,
      take the hit and get back to a single business with no
      dividends!!! Sorry Flip.

      Oh P.S. Cleo - you didn't
      advise on the VC/VTR REIT deal did you?

    • And the head, hitting that nail, is yours! No
      wonder, then, your postings are what they are!!
      Let me
      remind you, last time this board was so-o-o negative on
      this stock, was in April-May 1998. Hopefully, even
      you, with your damaged brains, could see, what
      happened to the stock since then!

    • I do not love or hate REIT structure. In fact, I
      have investments in some REITs. And I am NOT a REIT
      analyst.
      I do agree, in general, that for a fast
      growing company, a REIT structure probably is not the
      best.
      But, my problem here, is HOW THIS REIT HAS COME INTO
      BEING, WHAT COMPENSATION CCA SHAREHOLDERS GOT, etc.,
      etc. we went thru that many times.
      Should I take
      your saying, that problems at CCA began with the
      arrival of Junior, as a tacit agreement with my view,
      that he should be let go??!!

    • Whether Doc, Junior stays or goes isn't up to me
      or you. I don't know him and have nothing against
      him. As ususal, YOU missed MY point: CCA got into the
      REIT business because the "market" loved REITs. They
      came up with a better REIT idea (as far as REITs go),
      and the "market" couldn't figure it out.

    • Sitt'in on the DOC of the bay, watch'in the tide drift away. Me thinks the fat lady has begun her song. Enjoyed the jousting on this thread though.

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