Editor's note: This article has been corrected. The Northeast Ohio Correctional Center will not be empty after the contract with the federal government ends.
Shares of prison operator CoreCivic (CXW 3.94%) fell as much as 13% on Feb. 26. The primary cause appears to be a business update provided by the real estate investment trust (REIT) after the market closed on Feb. 25. It wasn't good news, but there are bigger implications to consider here.
The specific news that caused investors to push CoreCivic's stock lower was that it entered into a 90-day extension with the U.S. Marshals Service for its 2,016-bed Northeast Ohio Correctional Center. After the 90-day extension is up, however, the REIT does not expect further renewals of the contract. The Marshals Service currently houses roughly 800 federal detainees at the facility. The facility also houses inmates for the state of Ohio.
The bigger issue here is that the Biden administration has told the Department of Justice to stop working with privately operated criminal detention facilities. CoreCivic's role in the prison space has always been subject to politics, and now the political winds are blowing against its basic business model. One property isn't going to make or break the REIT, but assuming this is a sign of things to come, it makes sense that investors were spooked by the news.
Working for/with the U.S. government is often viewed as a good thing, given the inherent reliability of the customer when it comes to payment. However, dealing with Uncle Sam also comes with risks, since politics can turn a tailwind into a headwind very quickly. Notably, peer The GEO Group (GEO 0.72%) has also lost government contracts in recent months. This isn't to suggest that CoreCivic and The GEO Group are bad companies, only that they are currently facing a shift in the way they are viewed by one of their largest customers. Investors need to take that into consideration given that it is already having an impact on their businesses.