Prison Realty Shares Drop to Record Low
Prison Realty Trust Inc. shares tumbled to their lowest ever after the largest private prison owner said it would slash dividend payments and oust its chief executive.
Prison Realty shares fell 9% to close at $5.25, rebounding from as low as $4.50, after the company said it would end its status as a real estate investment trust, cutting the 44% dividend yield that attracted investors. To avoid taxes, REITs must pay out at least 95% of net income to shareholders.
“Because it’s no longer an income-paying stock, investors who held it just for the dividend will be selling,” said Robert Norfleet, an analyst at Davenport & Co. who rates the company a “hold.”
The move to conserve cash came as new investors--Blackstone Group, Fortress Investment Group and a unit of Bank of America--agreed to a $350-million infusion. Credit Suisse First Boston and Lehman Bros. Holdings Inc. also arranged a new $1.2-billion credit line. Proceeds will be used to replace an existing $1-billion loan and finance operations for the company, which will be renamed Corrections Corp. of America.
As a condition of the new investments, Prison Realty’s chairman and chief executive, Doctor R. Crants, who co-founded the Nashville-based company in 1983, quit as chairman immediately and will relinquish the CEO post when the transaction is completed, probably in the second quarter of next year. He will become vice chairman of the company.
Former Chairman Thomas W. Beasley, who was Crants’ roommate at West Point and one of three founders in the company, will become interim chairman immediately and interim chief executive when Crants steps down.
Crants’ son, Robert Crants III, who was president of Prison Realty, will also resign effective immediately. His interim replacement is J. Michael Quinlan, president and COO of Corrections Corp.
The restructuring is a turnabout for the company, which Crants turned into a REIT in April 1998. Shareholders protested that plan, which took the company from a high-growth prison operator, whose shares had jumped about 90% a year between 1993 and 1997, to a slow-growth but high-dividend-paying real estate company.
Crants defended the move, saying with the economy so strong, state governments had little incentive to hand over the management of prisons to private operators. Instead, the future was in building and owning prisons for states.
Then in the summer of 1998, six prisoners escaped from its facility in Youngstown, Ohio, garnering national attention and bringing renewed criticism of the private prison industry.
Another blow came in May, when the company disclosed it would increase the fees it pays to the affiliated prison-management company owned by Crants to keep that company afloat. Analysts estimates that could cost the company another $90 million a year.
In the transaction, the investor group agreed to purchase $315 million in securities from the company. The group will buy an additional $35 million in securities in a newly configured company to be created through the merger of Prison Realty and the companies collectively operating under the name Corrections Corp. of America, which managed prisons it leased from Prison Realty.
The new credit line “has more favorable terms,” than the one it replaces, “reflecting the lending community’s renewed confidence” in the company, according to Beasley.
The existing loan was split into a $400-million revolving credit, due Jan. 1, 2002, as well as a $250-million term loan and a $350-million term loan due Dec. 31, 2002.
Formerly known as Corrections Corp. of America, Prison Realty owns 51 prisons in 18 states, the District of Columbia and Britain.
Fortress is a New York-based real estate investment company formed in April 1998. The group manages about $760 million, primarily invested in real estate both here and abroad.
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Real Estate Trends
El Segundo Office Net Absorption(in millions of square feet)
Eight-quarter average:
0.04 million square feet
El Segundo Office Vacancy Rates
3rd quarter 1999, with sublet: 11.8%
Note: Net absorption reflects the gain in rented space. Vacancy rate is the total vacant square footage divided by total rentable square footage in all existing buildings. Sublet space is space rented by primary tenants that is vacant and available for sublease.
Source: CoStar Group Inc.
