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The GEO Group's 2009 Q4 Conference Tells of Speculative Building, Stock Buybacks

On February 22nd The GEO Group announced their Q4 earnings in an investor conference call. CEO George Zoley said, "our financial performance in 2009 was the most successful in our company's history, achieving new highs in revenue and earnings results." The company reported a 2009 yearly revenue of $1.41 billion and $1.46 in earnings per share.

However, what struck me the most was the large amount of speculative building  - construction of additional beds without a contract to fill these expansions - the company has embarked on. Zoley explained:

"In Michigan, our 530-bed North Lake facility is being expanded by 1,225 beds. As you may be aware we have submitted this expanded facility in response to the Bureau of Prisons'  CAR-9 Procurement. CAR-9 was expected to result in an award of approximately 1,700 to 2,000 beds in late 2009 and early 2010... While the BOP continues to have a need for these beds, the decision on CAR-9 has been delayed primarily due to funding concerns related to the agency's future year budgets. As a result of this delay, we have decided not to assume any revenue contribution from our Michigan facility in our guidance at this time, and we continue to market this facility to other potential clients as well, and we hope to be able to activate this facility later in the year."

What Zoley did not explicitly state is that the North Lake facility is currently idle, and that the expansion project will cost $60 million. Spending this large amount of money on a facility that is not even listed on the company's website as an "existing facility" without a contract to justify the expansion is either very foolish or very insightful. This wasn't the only example of speculative building, though. Next, he stated:

"In Colorado, our 432-bed Aurora immigration detention facility is being expanded by more than 1,000 beds. We believe that our Federal clients, primarily ICE and the U.S. Marshals, will continue to need beds as they consolidate existing populations into larger facilities such as our expanded Aurora facility. However, we currently don't have a contract for the use of the expanded beds and therefore have decided not to include and revenue contributions from these beds in our initial guidance for the year."

Again, this is either very foolish or very insightful. However, evidence for the former appears everywhere as Colorado seeks state-level reform in their immigration detention because of inmate maltreatment. Additionally, ICE has recently come under fire for the deaths of 100 immigrant detainees in their facilities. The President has also suggested reforming immigration detention because of these alleged abuses. Business opportunities in immigrant detention could dry up based on these immigration reform movements, and for GEO to continue to invest their money in immigrant detention could be misguided. Zoley also spoke of a third facility that has yet to finalize a contract:

"As I discussed previously, we are also scheduled to complete construction of the new 2,000 bed managed-only Blackwater River facility in Florida by July 1 of this year. Again, we have decided not to include any revenue contribution from this facility in our 2010 guidance until the state of Florida notifies us regarding the facility's opening date."

The Blackwater River facility, if/when it is opened, will primarily fall under the jurisdiction of GEO Care, a mental-health subsidiary of The GEO Group. 

However, these speculative prisons were not the center of the conference call. The big news (for investors) came when Zoley announced their stock buyback program:

"...our board has authorized a stock buyback program up to $80 million effective through March 31st, 2011 as announced in our press release this morning. We expect to implement this program with an opportunistic strategy that maximizes the executory returns for our shareholders and does not impede our company's continued growth process."

The purpose of the program, as implied by Zoley, is to increase the price of their stock shares by buying back outstanding shares and leaving fewer shares on the market for sale. Decreasing the amount of available shares would increase the price per share, potentially giving a rise to their stock price.

What exactly caused the drop in share price is all speculative--whether the immigration reform movements or the allegations of rampant abuse in private facilities caused the drop is totally opinion-based. With Zoley claiming it was the company's best year in terms of revenue and earnings, it seems odd that the stock price would need a boost by way of a stock buyback program. Regardless, the day the buyback program was announced, The GEO Group stock (NYSE: GEO) saw a trade volume of 1,084,200 shares -- the largest amount of shares for GEO traded in a day since November 2008. That is, until ten days later when the CAR-9 solicitation was cancelled and just over 2 million shares were traded following the subsequent plummet of the GEO stock price by about $2 per share, the opposite of the intentions of the stock buyback program. However, since then the stock price has risen by about $1.50 per share despite the loss of the important CAR-9 solicitation, perhaps the buyback has achieved some of its intended effect. 

The remainder of the conference call was mostly the usual comments about how they are ready for future opportunities and that opportunities for growth exist. In general, the call was fairly standard procedure with the executives attempting to convince the shareholders that everything is well and good within the company. What will come of these speculative moves is something that will be of great interest. Only time will tell whether these often-hazardous speculative projects are beneficial or not to the company.

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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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The GEO Group's 2009 Q2 Conference Call Outlines Plans for Profit

On August 3rd, The GEO Group held their second quarter conference call for investors. In this meeting, the company outlined the deals that have been enacted so far this year as well as plans for future profit. Their total Q2 revenue came to $276 million, which they stated would rise to $300 million by the end of next quarter. The company CEO, George Zoley, attributed this expected rise in revenue to the 5,900 additional beds created in 2008 which have been filling up. He additionally noted the significance of the 100 bed addition to the Florida's Broward Transition Center contracted with ICE, as well as the 192 bed expansion to Georgia's Robert Deyton Detention Facility which is contracted with the U.S. Marshals.

The most discussed change within the investors (if the question and answer portion of the call is any indication) was the U.S. average per diem cost increase for holding detainees, up to $53.97 from $53 during this time last year. The per diem rate is what a private prison company charges its clients per day for each detainee in their facilities. This rate is a key component of how a company accrues its income, and is different for each contract, as each state has their own rules, regulations, and costs of living (but the per diem rates are also largely negotiable and dependent on the hardball negotiations of those doing the "dealings"). The per diem rate is a lump sum includes services for inmates such as food, healthcare, utilities, etc. as well the costs of staff salaries and facility maintenance. If a per diem is too low and expenses too high, the company will begin to lose money. Additionally, if a per diem is too high, the company's services will seem less appealing to their clients who think they could do the same job for cheaper--the key is to find the lowest per diem rate that will both cover the necessary expenses for running a prison while giving a desirable profit for the company without gouging their clients. One reason that GEO board members attributed this rise in per diem rates to was the increase in the Department of Labor's mandated salary requirements. Because their prison employees are required to have higher wages, prison companies are asking for more money to cover the pay difference. The GEO representatives stated that staff turnovers in their facilties are low (meaning that there are less new guards who need training--an expense) except for in two unnamed Texas facilities where employment is low. Having low staff turnovers means they have less required expenses for training, and more room for profit. However, a critical investor was worried that the cost of living in a recessing economy might surpass the per diem rates (if not now, maybe in the future), but GEO's representatives skirted the comment without declaring their average per diem or total expenditures and simply reassured the caller that their low staff turnover and refined staff vacation policies are sufficient enough to keep their expenses below their per diem rates.

Zoley also went over their newest additions for the year as well as outlined upcoming projects that are scheduled for completion in the near future. In January, the company completed a 192 bed expansion at the Robert Deyton Detention Facility in Georgia, as mentioned before, and stated that it will add $4 million to their operating revenues. This year, the company has also assumed management of the 256 bed Harmondsworth Immigration Removal Centre in the United Kingdom, and stated that they plan to expand it by another 364 beds by the end of June 2010. Other noted important expansions are with Florida's Graceville Correctional Facility where another 384 beds will be added to the already existing 1,500 by the end of the year. Also, The Geo Group's 1030 bed immigrant detention facility, the Northwest Detention Center in Tacoma, WA is planned to see an additional 545 beds by the end of the year. Lastly, in Aurora, CO, the company plans to expand its 400 bed facility almost 200% by adding 1,100 beds to their Aurora ICE Processing Center by the year's end. Zoley cited that the Tacoma and Aurora facilities are expected to have "a material impact" on the company, and The GEO Group plans to put the majority of their remaining fiscal yearly budget of $84 million into these facilties over the next two quarters, as they are planned to be the largest money-makers for the company.

George Zoley discussed why these expansions were necessary and had the following to say:

"The main driver for the growth of new beds at the federal level continues to be the detention and incarceration of criminal aliens. The U.S. Marshals service and the [Bureau of Prisons] both house criminal aliens facing criminal charges or are serving time as a result of a conviction. The ICE population includes approximately an equal number of undocumented aliens and criminal aliens who have completed their Federal or state sentences and are awaiting deportation. More than 2/3rds of the 10,000 aliens housed at our federal facilites are criminal aliens with less than 1/3rd being non-criminal aliens."

With the $1.4 billion in federal funding for ICE's Secure Communities Initiative, The GEO Group is wasting no time to get their piece of the proverbial pie.

Since the conference call and the end of the company's second quarter, GEO's subsidiary company GEO Care has bought out Just Care, Inc. for $40 million. GEO Care is The GEO Group's project to house mentally-ill inmates as well as sex offenders in separate housing facilities to try and rehabilitate them in a more conducive atmosphere for their illnesses. The acquisition is expected to increase the yearly revenues by $30 million, meaning the company's projected 2009 total yearly revenue is expected to exceed $1.1 billion. With the Federal prisons operating at 137% total capacity, some serious legislative work for crime control and alternative sentencing is needed to decrease the prison population or else we can expect to see these staggering numbers rise in the near future.

See the latest economic developments for GEO Group's largest competitor, Corrections Corporation of America here.

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