Top Performing Prison REITs for 2019

By: , Contributor

Published on: Oct 30, 2019 | Updated on: Dec 07, 2019

A quick introduction to the top prison REITs.

Investing in prison real estate is a thing. Prison real estate investment trusts are a new phenomenon that allow private prison companies to restructure as real estate investment trusts (REITs) as long as the bulk of their assets are in real estate. 

By operating as a REIT, companies can benefit from lower taxes and other advantages. 

REITs more commonly invest in traditional real estate properties like retail stores, apartment buildings, and hotels. But a new wave of specialty REITs focusing on niche areas, like data centers, cell phone towers, and prisons is becoming more popular.

Prison REIT controversy and social responsibility

The prison REIT sector is small, with just two large publicly-traded REITs in the market today. CoreCivic and Geo Group both converted to REITs in 2013. Combined, these two REITs owning about 75% of the private prison industry.

While the idea of investing in prisons and incarceration for a profit is a controversial one, there's an active investor market for it. However, we’d be remiss if we didn’t mention that investing in prison REITs has negative connotations and comes with a few pitfalls to be aware of. 

Negative publicity coupled with social implications can make prison REITs a risky choice. Some are hesitant to invest in the sector because they view it as making a profit from incarceration. Critics say for-profit prisons have led to things like excessive sentencing and poor conditions for inmates. This has led to several financial institutions pulling out of the sector.

In fact, earlier this year, JPMorgan Chase, Wells Fargo, and Bank of America all stopped financing private prisons amid pressure from social activist groups. As recently as July 2019, Suntrust became the latest bank to stop financing private prisons. Both REITs’ stock prices took a tumble after the news. 

Meanwhile, prison REITs continue looking to establish government contracts so they can finance, build, and maintain prisons as part of their portfolios. They're also looking to diversify their portfolios and expand beyond prisons. For example, CoreVest is exploring government-leased office properties.

Social responsibility has also become a top agenda item at both REITs as they work to remove the negative stigma attached to prison REITs by focusing on community outreach and rehabilitation programs. 

The top prison REITs

REIT Headquarters 1-Year Return
Geo Group (NYSE: GEO) Boca Raton, Florida -25.03%
CoreCivic (NYSE: CXW) Nashville, Tennessee -28.11%

Data source: NAREIT. Returns current as of Oct. 30, 2019.

Two prison REITs account for the bulk of the private prison market. CoreCivic was founded in 1983 and is based in Nashville. Geo Group was founded in 1984 and is based in Boca Raton, Fla.

Together, the prison REITs have a market cap of $3.78 billion divided almost evenly, according to the National Association for Real Estate Investment Trusts.

Geo Group transitioned to REIT status in 2013. It has a market cap of $1.90 billion and specializes in privatized corrections, detention, and mental health treatment. Although headquartered in the U.S., the company has facilities throughout North America, Australia, South Africa, and the United Kingdom. Geo Group owns or manages 135 facilities.

In 2017, the REIT acquired Community Education Centers for $360 million, giving it ownership or management of about 100,000 beds worldwide, making it the largest corrections organization in the world. 

Recent news includes a 314-bed expansion at the Montgomery Processing Center in Conroe, Texas. The Geo Group said its diversified services included educational and vocational programs, cognitive behavioral and substance abuse treatment, and faith-based services across the entire corrections spectrum.

CoreCivic also became a REIT in 2013. The company’s market cap is $1.88 billion and it owns and operates private prisons and detention centers. The Nashville-based REIT has close to 100 facilities scattered throughout the United States. In addition to corrections and detention services, CoreCivic also has residential reentry centers.

In September, the company made its first acquisition in Michigan since it started acquiring non-prison properties in 2017. The addition is part of the REIT’s government-leased building portfolio and is home to the Michigan Department of Health and Human Services.

Forecast for prison REIT investing

States and local governments are turning more to private prison operators as partners because of the lower costs associated with them. 

The Justice Department noted that prisons in the U.S. have the highest incarceration rates of any developed nation with about 754 per 100,000 people sent to jail every year.

The inmate population continues to grow while occupancies at state prisons remain tight. This all bodes well for prison REITs.

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TMFCarisa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.