Prison operator CoreCivic (NYSE: CXW) has been under a tremendous amount of pressure in recent years. Several headwinds have impacted the company, ultimately leading it to convert from a real estate investment trust (REIT) back into a taxable corporation. Because of these setbacks, its stock price has lost nearly two-thirds of its value in the last three years.
Here's a look at the troubles facing CoreCivic and what it's doing to weather this storm.
The pen is mightier than the sword
Private prison operators like CoreCivic have been facing increasing opposition in recent years. There's a growing disdain for the idea of profiting off incarceration because of misaligned incentives -- they make money based on the number of people detained in their facilities -- and other issues that aren't helping solve the country's criminal justice system problems.
Because of that, the company has had trouble financing its operations, as a growing list of banks won't lend to the sector. Further, lawmakers have put additional pressure on the industry, calling for greater oversight.
Earlier this year, things came to a head when the Biden administration took executive action to reduce the federal government's use of private prisons. Those policies directed the Department of Justice not to renew contracts with privately run prisons.
This action has had a noticeable impact on CoreCivic. For example, CoreCivic said the U.S. Marshals Service (USMS) was unlikely to exercise its contract renewal option on a 600-bed facility in Tennessee. The company generated $18.4 million of revenue from this facility last year. It has another lease with the USMS coming up for renewal later this year that isn't likely to be renewed.
Taking action to stay afloat
In view of the challenges facing the company, CoreCivic has taken several actions to shore up its financial profile so it can continue operating. As noted, it converted back into a corporation to start this year. That allowed it to retain more cash instead of having to pay out 90% of its taxable net income via dividends to remain in compliance with IRS REIT guidelines.
In addition, the company has been selling assets. It sold three real estate properties in June for $326 million. It also sold two idled noncore properties in the second quarter for $2.7 million. It used the proceeds from these transactions to help repay debt.
CoreCivic also tapped the public bond markets because of this sector’s difficulty in borrowing money from banks. While it raised $225 million -- more than the $100 million it initially sought -- it will pay 8.25% annual interest on the notes, which mature in 2026. That's a high price in today's low-yield environment. However, it made sense for the company to take advantage of an opportunity to raise cash, given its dwindling financing options.
On a more positive note, the company has been able to renew some nonfederal contracts. It secured a new contract with Mahoning County to utilize up to 990 beds at its 2,016-bed Northeast Ohio Correctional Center. That replaced an agreement it had with the USMS for up to 992 beds at the facility.
It also expanded a contract with the state of Montana and renewed another one with Hawaii. Additionally, the U.S. Immigrations and Customs Enforcement agency (ICE) renewed a contract with CoreCivic for a 300-bed facility through 2023.
A troubling situation
There's no doubt that CoreCivic's core business is facing significant headwinds. Executive actions by the Biden administration could cause a steady loss of contracts in the coming months. While the company might be able to secure contracts with other government agencies for these facilities, there's a real risk it might have to idle more facilities. On top of that, it's facing increasing costs of financing for its business as banks stop lending to the sector. Because of all this, CoreCivic will likely continue having trouble creating value for shareholders in the coming years.