Is There a Long-Term Play For Geo Group?

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

Geo Group Inc. GEO is a real estate investment trust that invests in private prisons.

It’s also one of the most recent short squeeze targets, climbing 38% June 9 before falling nearly 19.7% the following day. 

Geo Group’s Outlook 

Geo is facing some serious problems as its contracts with the Federal Bureau of Prisons come to an end.

President Joe Biden signed an executive order during his first week in office directing the Justice Department not to renew any contracts with private prisons. 

According to the company’s first-quarter supplemental financial disclosure, the Bureau of Prisons accounted for 11.6% of Geo's total revenue.

The company also leases properties to two other federal agencies: the United States Marshals Service and U.S. Immigration and Customs Enforcement (ICE), which make up 13.8% and 23.1% of total revenue, respectively. 

The executive order doesn’t cover ICE, since it is an agency of the Department of Homeland Security.

Geo Group’s contract with ICE includes payments based on occupancy, which has been significantly reduced since the beginning of the COVID-19 pandemic as the agency reduced its operational capacity. 

Regarding the U.S. Marshals Service, the agency doesn’t own or operate any detention facilities so ending private prison contracts isn’t as simple as moving prisoners to to in-house facilities. At this point, it’s uncertain how things will play out with these locations.

Geo Group Chairman and CEO George Zoley said during the first-quarter call that three of the company’s contracts with the Bureau of Prisons have expired since the executive order was signed in January.

The company also expects three more of its facilities to go into idle status in 2021 and for more contracts expire this year. 

Geo Group’s board of directors also suspended quarterly dividends in April after cutting them from 34 cents per share to 25 cents per share in January 2021.

This resulted in a hit to Geo's stock price since one of the major draws to this REIT historically has been their high dividend yield. 

The move to suspend dividends was a necessary one, though, in order for the company to aggressively pay down their debt, which should be a long-term benefit to investors. 

How Geo Group Can Move Forward

It might seem like buying shares of Geo Group as a long-term investment right now would be a dangerous bet. However, the company has options available to adjust its business model and actually realize some long-term growth. 

For one, the company still owns several state and international facilities that aren’t affected by the executive order. Arguably Geo's  best path forward, however, is in its non-prison facilities and services. 

According to Geo Group’s most recent investor presentation, the company operates over 70 non-residential reentry centers, two residential reentry centers, and provides electronic monitoring for over 155,000 supervised individuals on electronic monitoring.

Geo has an in-house secure transport division, Geo Transport, Inc., which provides secure transportation to federal, state and local government agencies. 

During the company’s recent earnings call, Zoley also stated that the board is reviewing its corporate tax structure as a REIT. This could be an indication that the company is considering expanding its non-real estate revenue beyond what is allowed for a REIT. 

Geo Group has started moving forward in a direction that acknowledges prison reform efforts. The company announced during its earnings call that it was awarded a new contract by the Federal Bureau of Prisons since the executive order was signed.

This contract is for a 118-bed residential reentry facility in Tampa, Florida. 

Considering Geo Group’s relationship with the Bureau of Prisons is over 30 years old, and there has been a growing push to reduce the number of people incarcerated in prisons, the likelihood of the company earning similar contracts seems promising. 

It’s important to keep in mind that the company’s federal contracts aren’t ending due to any conflicts with the agencies or a deteriorating relationship. It’s simply a new order that all parties have to comply with.  

GEO Stock Value

Understanding Geo's value requires looking at financial metrics that are specific to REITs. Instead of looking at the P/E ratio, which doesn’t provide an accurate or consistent picture of a REIT’s value, we need to look at the company’s FFO multiple. 

The company issued guidance for 2021 anticipating total FFO of $212 million, putting its FFO per share at $1.73. With a share price of $7.05 at the close on June 10, Geo stock has a FFO multiple of 4.07x. This is extremely low compared to other REITs, meaning its shares are priced at a steep discount right now. 

See also: How to Invest in REITs

Buying Geo Group Stock As A Long-Term Investment

Geo Group clearly has a lot of work to do in order to get the company back on a path to growth, but that’s why this value opportunity exists. Also, it doesn't ecessarily have to pull off any substantial growth to be a good investment.

If the company achieves its debt paydown goals and replaces some of its lost revenue with its non-prison ventures, they could become an attractive income play with high dividend yields. 

GEO has historically been a high-dividend REIT, with yields that were as high as 17.8% just last year. Even returning to its lowest dividend rate since 2012, at $0.25 per share quarterly, buying Geo at $7.05 per share would result in a 14% dividend yield. There may be more reasons to buy this REIT than a short squeeze.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.