Video: Buying the big house

By Jane Wells Correspondent
CNBC
updated 7/6/2005 3:13:07 PM ET 2005-07-06T19:13:07

What if you could invest in a hotel that’s guaranteed to be sold out every night? Well, that’s what a prison is, except it also has bars and armed guards.

It may not sound as exciting as flipping condos in Miami, but some see investing in prison development as a good opportunity.

In the world of real estate, there are four stocks related to prison development: Corrections Corporation of America, GEO Group, Cornell Companies and Correctional Properties Trust — a real-estate investment trust (REIT) that pays out 90 percent of profits as dividends (although analysts are cautious on it, waiting for the firm to complete more deals.)

Cornell develops not only prisons, but also juvenile facilities, transitional facilities for those leaving prison, mental-health facilities and alternative-education establishments.

The company has seen a volatile performance lately and a shake-up at the board level. But the company’s CEO James Hyman — recently re-elected as chairman — says the company will return to profitability this year.

Hyman’s background is in the hotel business, and he draws parallels between that industry and prison development. But when asked if prison costs are higher, he said it all evens out in the end.

“There’s a lot of specialized equipment — for example, we’re putting in specialized high-security doors, but were not putting in marble-topped bathrooms and you’re running at 100 percent occupancy,” he said. “There’s big growth in transition, and also in specialized programs, but it’s a thin margin business, so if you don’t manage well you can trip into a position of not being particularly profitable.”

Another difference with the hotel business is it has dynamic pricing; rates go up and down based on tourism. But prison pricing is stable, and land costs are lower — you’re out in swaps and deserts most of the time, although that means labor is sometimes hard to find.

Hyman just announced he’s going to buy $130,000 worth of stock to show his commitment to the company.

Investor Don Hodges of Hodges Capital Management has owned shares of Corrections Corporation and GEO Group for a long time — ever since Corrections Corporation was $2.50 a share, in fact, and it’s now near $40.

Hodges says the industry has suffered through a period of over-expansion, but there are now growth opportunities, he adds. The prison population continues to grow more than 3 percent a year, and private operators, which can do the job of prison management at a lower cost than the authorities, only runs about 6 or 7 percent of all prisons.

Hodges admits stocks in the sector haven’t done much lately.

“If you take a long, broad look at the industry and the group, the best time to buy these stocks is when they’ve had a disappointing quarter,” Hodges said. “It doesn’t mean the stocks are going to go up quickly, but at least you’re taking advantage of maybe one quarter that is disappointing in a long upward movement.”

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