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The GEO Group's 2009 Q3 Conference Call Tells of Vacancies and Sale/Leaseback Initiatives

The GEO Group recently held their Quarter 3 investor conference call for the year. As usual, the call started off with the basic financial information. Their quarterly revenue went up from last quarter, $276 million to $295 million, with a projected Q4 revenue of $313-318 million. However, their average domestic U.S. per-diem fell from last quarter, down 24 cents to $53.73 from $53.97. The executives were eager to reassure their investors that with their average of $67.00 for their international per-diem rates that the drop was not a problem for them overall. Most of the conference call was centered about the next topic: that the company is suffering drops in occupancy rates. The average occupancy rate for Q3 was 95%, down from 97% last year at this time. Their initial response was that this rate had fallen because the company just added a lot of additional beds. However, investors were not taking the bait on this one, as empty new beds are just as detrimental to profit as old empty beds. This comment was odd, because an investor asked about the company's view of speculatively building prisons, to which GEO Group CEO George Zoley replied, "we will not proceed with any speculative building in advance of any contract award...that's not to say we are not prepared for any future opportunities." If the company wasn't interested in speculatively building, why would they have brand new empty prison beds that are hurting their occupancy rates? When one investor asked what the real problem was, Mr. Zoley replied:

"Our ten state customers have had budget cutbacks this year that we are already living with. From my view, I really just see a continuation of that same situation. Our performance this year has already been impacted to some extent by state economic difficulties and if you look at our occupancy, where it has historically been at 97% it's only 95% so if the states weren't having their current problems our performance would be even higher than it presently is by virtue of the occupancy. But it is what it is, and I really just see a continuation of the current situation."

It was interesting that he claims that he foresees a continuation of State hardships during an investor meeting. Honesty may be the best policy in this case though. State hardships can open the door for desperate state-owned facilities to go up for sale, as in the case of Arizona, even though privatizing the state's corrections department ultimately saves little (if any) money in the long run. An investor asked Zoley about Arizona and their tentative proposals and whether or not The GEO Group had plans to contract with the state:

"There's certainly a lot of movement towards that direction. The state has a severe budget deficit and a recent public article has indicated that all the departments would have to take almost a 15% cut unless new money is found, and the sale/leaseback initiative as well as the concession agreement initiative are a means of which to provide that additional funding. And if this process is successful in the state of Arizona, it could be a game-changer for our industry because I think it will be quickly emulated by several other states around the country."

The sale/leaseback initiative is a way for Arizona to essentially sell an asset (in this case their entire prison system) to a private entity (say, The GEO Group) and then the state would lease the asset back over time (until the budget has leveled itself out, ideally).  Arizona would receive an initial lump sum from the sale of the asset from The GEO Group, which would help their deficit, and then Arizona would slowly buy back the asset over a contractually specified amount of time. This may sound like a good idea for Arizona at first, but over a long period of time it is likely that they will have to pay back more money to The GEO Group than they received in the original lump sum in order for the deal to be of interest for GEO.

If Arizona does this, it would indeed be a game changer for The GEO Group. Deals like this allow prison companies to obtain property quickly, without having to construct a facility; as well as easy ways for a State to receive significant revenue without permanently selling off their assets. When the asset has been leased back from the state, GEO can move on their merry way, having made a fortune from the per-diem rates and the leaseback (with interest) and with minimal upkeep cost. Arizona has already started this procedure with some office buildings, but not yet for prison facilities. 

Overall, The GEO Group's Q3 call was not as positive as the Q2 conference call. The executives gave off a confident presence but had an underlying tone of skepticism towards the prison market. This might be why GEO's COO Wayne Calabrese sold 31,000 shares of company stock at $18.83 a piece on September 10th and the CEO George Zoley sold 45,000 shares of GEO stock at $21.71 a share on November 9th ("The GEO Group Inc. (GEO) Chairman and CEO George Zoley Sells 45,000 Shares," Guru Focus, 11/09/2009). Either these men know something we don't, or their mortgages were past due. Regardless, whatever is said by the chairmen during these quarterly meetings does speak louder than these actions.

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