Reit investors see a buy signal in cells

At a private prison in the US, a group of men is being escorted through the bare corridors. But instead of being told the time for lights out, or how often they will be let out of their cells, these men — clad in business suits instead of orange jumpsuits — are being briefed on operations at the complex.

That is because the prison is not just a penitentiary; it is also a prized asset. GEO Group and the Corrections Corporation of America — the two big owners of for-profit prisons in the US — are New York-listed companies with market capitalisations of $2.6bn and $4bn, respectively. They observe the rituals of investor relations like any other public company, including showcasing their businesses to analysts and bankers.

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What attracts investors to CCA’s roughly 60 facilities and 80,000 beds, however, has little to do directly with the business of incarceration.

Instead, they are drawn by CCA’s 2.4 per cent effective corporate tax rate, and its obligation to pay out at least 90 per cent of its income as dividends.

This is because CCA, like its rival GEO, converted into a real estate investment trust (reit) two years ago. CCA created a so-called taxable reit subsidiary, which is taxed as a private company and operates its prisons, while the rest of the company became a property business — with lower tax obligations and a higher market valuation.

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