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| Their "customers" are all outfitted in Guantanamo orange. Care to invest? |
There are of course different arguments about the virtues and vices of corporations running prisons. From the right, some would say that for-profit businesses are more efficient in running jails Stateside. On the other hand, those from the left caution that private prisons encourage unnecessarily tough sentencing since these businesses profit from more people being thrown in jail for longer regardless of whether sentences meted out are just. Because of the political controversy surrounding prison REITs, they provide higher dividends than other kinds of REITs. But, there are caveats for would-be investors like Democrats running for the 2016 presidential elections seeking to reduce tough sentencing and hence the number of prisoner-customers for these REITs:
Take, for instance, some major prison REITs:The small and controversial sector of for-profit prison companies, which operate as real estate investment trusts (REITs), have been under pressure this year, underperforming the broader REIT sector, which has itself lagged behind the general market. The two main prison operators have been dogged by the prospect of new government regulations, with presidential candidates Hillary Clinton and Senator Rand Paul among those calling for criminal justice reform, an issue seen as a threat to the group. While supporters argue that private prisons save taxpayer money, critics charge that the companies' for-profit model has led to excessive sentencing and poor conditions for inmates.
Corrections Corporation of America, which has a market capitalization of about $4.1 billion, is down 5.3 percent in 2015 while Geo Group is down 9.4 percent. The Vanguard REIT ETF, a popular way for investors to play the broader space, is down 4.9 percent. Analysts say the year-to-date declines in prison stocks mean potential headwinds have been priced in, positioning them for gains even as the appeal of the overall REIT sector wanes. In an indication the selloff has been overdone, Corrections trades almost 16 percent under StarMine's measurement of intrinsic value, which looks at anticipated growth over the next decade."There is a lot of uncertainty surrounding reforms, causing prison REITs to trade at a discount to the REITs that aren't tied to government spending, but you've already seen them pull back, meaning that from here there's more upside than downside potential," said Eric Marshall, portfolio manager at the Hodges Funds in Dallas.
Marshall, who has a stake in Geo, also praised the high dividend yields of prison REITs, which surpass those for the sector at large. Corrections' yield is 6.25 percent while Geo's is 6.74 percent. Three of the biggest REITs by market cap - Simon Property Group, Public Storage and Equity Residential - have yields below 4 percent. The S&P's yield is 2.38 percent.
