Dy2 mentioned the downsides in the management-only model - i.e. that they are less "sticky" than owned-and-managed contracts and that margins there are lower. That is certainly accurate. On the other hand, however, there is a substantial capital investment involved in the case of the ownership model. Therefore, the return on investment is much lower there. And, if you DO lose a contract (e.g. Northeast Ohio), the interest cash drain can hurt you for years because it takes a long while to refill a prison (not to mentioned the equity capital that is sitting idle).
In my opinion, it was the management-only business that deterred the banks from putting this company into bankruptcy a couple of years back. Since the "rent" portion of the cash flows from owned facilities was far less than needed to support the debt and since there was a real risk that the states will take over facility management in case of bankruptcy, CCA�s management was able to negotiate from a strong position and save shareholders from being wiped out. So, managed-only contracts are a sort of an insurance policy as well.
Lastly, it is management of prisons, more than the ownership or construction of prisons, that is the main value proposition this company has to offer. When it comes to ownership, CCA is actually at a disadvantage vis a vis a REIT like CPV.
This is not to say I'm against owning some facilities. Ownership has its merits in that it generates a more "sticky" business. I just think that the company should continue to keep a balance b/w the two models.
CXW's Research page was updated last week to reflect consensus opinion for FY04 of $1.24, which the "Growth In Earnings" segment (below it on the page) reiterates is a -23.5% decrease from the $1.62 it is showing for this CFY (FY03).
If, as has been mentioned in previous messages (#20103, #20107, etc.), CXW's NOL should reap benefits to shareholders for several years to come, and there isn't a significant increase in S/O taking place to account for the diminution, can someone please account for the drop?
The General's synapse aren't firing properly. TIA.
Yes I got ahead of myself, they are worth dollar for dollar in taxable gross income, of course not net, as "winwithceltics" pointed out. Also I believe some of that NOL is under the IRS microscope too, but never the less it's a big number and should benefit CXW shareholders greatly in the 7 years(?) ahead.
First paragraph does not make sense, what are you saying.
NOL's are great but they are not tax credits. They are worth 35% more or less of the NOL if we are profitable and have enough taxable income to eat them up before they expire. They are not worth 900++mm.
Doc Crants claimed that the margins were getting so slim on the management only business CCA HAD to move to owning. Plus it allowed more of a "turn key" sales approcah to prison management.
But as has been discussed here many times is the ability for CCA to build SOOO cheaply and lease out at Gov't adjusted cost basis that makes the effective lease rate WAY more then the implied rate on the lease agreement. Also it makes the margins so fat you can afford down time as I understood it.
As I see it the problem has been getting decent long term fixed rate secured financing on the facilities. CCA has floating rate debt up to 50% and $250mm unsecured fixed financing. Correctional Properities Trust (which is a triple net leasor that owns prisons) is also in the same boat. So it's not easy to build a new prison when you have to put up 50% equity and the debt side of it floats. Sure they are swaps but they are usual no more then 3-5 years.
Having two models is a good idea. You never put all of your eggs in one basket. Speculation
is what got DOC in trouble. Build them and they will come is only for the movies and baseball fields. There are many positive things on the horizon. I am glad to see healthy discussion back on the board. Looking
foward to the CC on Wed.
Doc Crants claimed many things... :-)
He could do that when the company was very secretive about its financials. Since then the company has offered a more detailed view of the unit economics. You can see for yourself that CCA earns decent margins on management contracts in the Supplements that they file.
Good comments. However, be very careful of using that four letter word around this board. Many of the "oldtimers" (myself included) have been there, done that - and the memories are not good, or as flipper says, a sick joke!
But.....a move into the $20's would brighten us all up, particularly in the current market.
Go Tom Ridge, fill those prisons.
Luck to all.