What happened
Shares of prison operator The Geo Group (GEO 0.53%) fell sharply at the open on Thursday, dropping as much as 15% in the first hour. By roughly 11 a.m. ET today, the stock had regained a little ground, but was still sitting with a 10% loss. The big news came out before the market opened, when the real estate investment trust (REIT) announced that a very material corporate change is on the horizon.
So what
The Geo Group has decided to abandon the REIT structure and convert to a traditional C corporation. That's a major shift, given that REITs are legally required to pass 90% of taxable earnings on to shareholders and by so doing, avoid corporate-level taxation. There are other nuances, but the dividend's elimination is a big issue here. Basically, The Geo Group's balance sheet is heavily leveraged, and it plans to use the cash that would have gone to dividends to help reduce its debt.
Image source: Getty Images.
This was not, however, a move that came out of left field. Management and the board started looking at the company's corporate structure way back on April 7. That followed the August 2020 announcement that peer CoreCivic (CXW -0.07%) was abandoning the REIT structure. That company's corporate shift took place at the start of 2021.
In other words, there was a very good reason to believe that The Geo Group was going to announce plans for this change, too, before the end of 2021. The actual shift to a C corporation will take place at the start of 2022. Despite the ample notice, investors still seemed to take a dim view of the update today.
Now what
CoreCivic's change of corporate structure could come with some tax consequences for investors, though it is too soon to tell exactly what the impact will be. But this isn't the only issue facing the company, as the federal government has been openly hostile to using for-profit prisons under the current administration in the White House.
At this point, most investors will probably be better off on the sidelines here until The Geo Group has a little bit of a track record under its new corporate structure.
