I just got an e-mail saying the four officers
indicted at Corcoran were acquitted today. However, I
don't see how this acquittal will cause any problems
for the company in filling Cal City or San Diego.
The Preferred has also gotten my attention in the
past, but I used my dividends to buy more common. My
biggest concern with the Preferred has to do with the
impact we'd see if additional preferred is issued in
conjunction with the upcoming Strategic Investor/Special
Dividend mess. In short, I would expect the price of the
existing Preferred to drop if additional Preferred shares
are issued, which seems possible.
too much emphasis on the insider purchases. Those
purchases were not that large, as a % of their existing
I'm guessing that you've read alot of the messages on
this board. If so, you've seen alot of energy expended
on guessing about the outcome of the Strategic
Investor and the composition of the Special Dividend.
While those have been interesting topics to discuss,
the real issue is occupancy.
When it's all
said and done, occupancy between 95%-100% will exert a
strong positive push to the stock price. Occupancy
around the present 90% places the company in a difficult
cash flow position.
It's difficult to put a
true financial profile together for this entity (CCA
and PZN) as evidenced by the fact that some very
sophisticated individuals here cannot reach consensus on a cash
flow statement. If you think about it, that alone is
very scary and probably a singularly good reason not
To put new money into PZN at this
time is merely a crap shoot. I'm not saying it's the
wrong thing to do, I'm just saying you are basically
guessing that this whole jumble of issues will work out
well. That jumble will work out if, and only if,
CCA/PZN are able to get occupancy up. Despite the
numerous issues flying around, it's that simple.
these prices, I think the potential gains outweigh the
downside but you should realize what you are getting into.
And that's a difficult thing to do with this company.
It is confusing because I should not have used
the term "earn". What I meant is that by my estimates
PZN/OPCO only generated somewhere in the area of $0.40 in
cash flow that is freely available to be paid out in
dividends. The other $0.20 (to get to the $0.60 total
payout) was financed in some fashion. When all the
amortizatons, deferrals, and other accounting alterations are
done, I'm sure they will show an FFO number in line
One of the problems this
company faces is that the structure of the agreements
between PZN and OPCO makes it so that the FFO and taxable
net income that PZN shows significantly exceed the
actual spendable cash that the combined entities are
generating (I believe this was done so that OPCO would lose
money during the first few years post-merger so critics
of the merger couldn't point to profits at OPCO as a
give-away to management of the private
When occupancy fell late last year, OPCO ended up
losing a lot more than intended which, in addition to an
expense "oversight", required PZN to increase the fees
payed to OPCO to keep them from hemorrhaging too badly.
This additional layer of fees and the way they are
accounted for, along with the lack of disclosure on the
timing of certificates of occupancy on new facilities,
leads me to be very uncomfortable trying to estimate
FFO and taxable net income figures. I rely on the
analysts (who I'm sure rely heavily on the company) for
In my mind the accounting issues
make FFO much less important for valuing PZN than it
is with most other REIT's. That is why I keep going
back to trying to figure out what sort of cash returns
this company is generating.
I was talking about the tenant incentive (and
similar) fees. PZN borrows, earns or somehow raises the
cash. When they pay the cash to OPCO, they credit cash
and debit not expense but prepaid expenses, which are
then amortized as expense over 12 years or
When OPCO receives the money from PZN, they debit cash
(which will be or has been spent on various operating
expenses) and credit deferred revenue or unearned fees or
something like that (appears on balance sheet as a
liability). This amount is amortized over the lease term as a
reduction of rent expense (same effect as
No customers involved.
I find myself getting confused by your
<<<I do not think they will be able to get next year's
dividend below about $1.80 on the current share base, a
dividend level they will not earn in Q3.
Are you saying the FFO (Cash Flow) estimate of $.57
is incorrect or that 95% of taxable net income is
less than about $.475?
Could you please
elaborate on your estimates for Taxable Net Income (that
PZN has to pay 95% of for REIT status) versus their
FFO (Cash Flow) for the following:
1999: TNI=? FFO=?
4th Qtr. 1999: TNI=? FFO=?
Year 1999: TNI=? FFO=?
Year 2000: TNI=?
When I look at the issue of when PZN/OPCO taken
as one entity will have sufficient cash flow to
cover PZN's dividend, I find that there is insufficient
disclosure on how the various fees are being accounted for
to back out an accurate number from the financial
Largely because of this, I took some time and built a
model "from the ground up" that looks at the number of
CCA beds, the margin per bed, overhead expenses,
interest expenses, contribution from the service
companies, etc. to come at cash flow from a different
Obviously, this process involves a lot of assumptions and I
will readily admit it is probably no more accurate
than an educated guess on how the accounting works
within the financial statements, but for what it is
worth it showed that even with the poor occupancy at
CCA in Q2, there was enough cash to support a $1.40
annual dividend. If occupancy in Q3 turns out to be
around 90% at CCA, then I think the numbers will show
that a $1.60 dividend could be supported with no
Unless PZN becomes extremely
creative with its accounting, I do not think they will be
able to get next year's dividend below about $1.80 on
the current share base, a dividend level they will
not earn in Q3. If PZN gets the FBOP beds and
approaches 100% occupancy by early next year, then I think
they will produce enough cash flow to pay next year's
dividend, whatever it may turn out to be on a per share
basis following potential dilution from an SI. If
occupancy stays in the 90% range, then I think PZN will be
generating enough cash flow to support the REIT minimum
mandated dividend by the third or fourth quarter of next