Shares of real estate investment trust (REIT) The GEO Group (NYSE:GEO) were off 10% as Wall Street opened on June 17, and were still down by 8.2% roughly an hour and a half into the trading day. The thing is, nothing material appears to have changed with the corrections facility operator. Investors were instead reacting to news from its peer, CoreCivic (NYSE:CXW), that sent that stock down by 20% or so in early trading.
The big news from CoreCivic was twofold. First, it's suspending its dividend. Second, and likely more important for investors in both CoreCivic and The GEO Group, is that CoreCivic is reevaluating its corporate structure. Given that the two operate using similar business models, investors appear concerned that The GEO Group could follow CoreCivic's lead on both fronts.
The crux of the issue is the REIT structure, which allows companies to avoid corporate-level taxation but requires them to pass at least 90% of their taxable income on to shareholders. Although that removes the issue of double taxation and leads to large payouts for investors (who must treat the dividends as regular income for tax purposes), it leaves REITs almost totally reliant on the capital markets to fund their growth investments. CoreCivic's stock has been languishing at low levels and its bond prices have been weak, too, so its cost of capital has been relatively high. This explains why it's considering dropping the REIT structure.
The GEO Group faces similar headwinds on the capital front, so it makes sense that investors would be worried that it too may suspend its dividend and start weighing alternative corporate structures. Thus, as investors sold CoreCivic, they also sold shares of The GEO Group.
Although there's nothing at this point to suggest that The GEO Group will suspend its dividend or alter its corporate structure, shifts like the one CoreCivic is considering do often sweep through industry niches. The problem is that, until The GEO Group comments on its intentions, investors will have no indication about what its plans might be. Uncertainty is in the air for the time being, and that increases risks for income investors who count on the dividends this REIT regularly throws off.