What happened
Shares of GEO Group (GEO +0.46%), a real estate investment trust (REIT) that develops and operates private correctional facilities for government clients, sank Tuesday on news that President Joe Biden plans to scale back the federal government's use of private prisons.
GEO Group stock was down 10.3% as of 3:10 p.m. EST.
Image source: Getty Images.
So what
According to an article published by Reuters, the Biden administration's policy will be to have the Justice Department decline to renew contracts with operators of private prisons. While that's short of an absolute ban, it doesn't bode well for operations such as GEO Group.
"Private prisons profiteer off of federal prisoners in less safe conditions for prisoners and correctional officers alike," explained the White House in a statement. The administration did not state a specific timeline for when it would begin declining to renew contracts.
Now what
Although technically an international business, according to data from S&P Global Market Intelligence, GEO Group depends on the U.S. for 89% of its $2.4 billion in annual revenues, and already, some of those revenues look to be at risk. Just six days ago -- Inauguration Day, though that may not have been the reason -- we learned that the Federal Bureau of Prisons would decline to renew an option for GEO Group to manage the 1,878-bed Moshannon Valley Correctional Facility in Pennsylvania, when that contract comes up for renewal on March 31.
Although the company says it will try to "market the ... Facility to other federal and state agencies," if it fails to find a new customer, this single contract non-renewal could cost GEO $42 million in lost revenues per year -- nearly 2% of its annual revenues.
Expect to hear the steady drip-drip of this company's revenues leaking away over the next four years, if not longer.
