The GEO Group (GEO) is a specialty REIT that owns, operates, and manages correctional, detention, and reentry facilities in the U.S., UK, South Africa, and Australia.
The portfolio is made up of a total of 107 facilities, including 86,000 beds. More than 90% of the beds are located in the U.S. The company’s revenue can be divided into three segments: U.S. Secure Services, GEO Care, and International Services. They contribute around 66.2%, 24.3%, and 9.5% of total revenue, respectively.
I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
The company used to be a solid REIT pick amongst income-oriented investors due to its historically hefty dividend payments and governmentally-sourced contractually secured cash flows, which provide predictable revenues and minimal counter-party risk.
However, the company’s investment case has deteriorated over the past couple of years. This is due to President Biden’s executive order directing the United States Attorney General not to renew U.S. Department of Justice contracts with privately operated criminal detention facilities, as consistent with applicable law, combined with investor’s disfavor towards allocating capital in correctional facilities.
The GEO Group has since suspended the dividend in order to focus on deleveraging in an attempt to reduce external liabilities and allow itself to self-fund its operations going forward. This was caused by external creditors also cutting ties with the company. All major banks have also cut business ties with GEO.
While the company could gradually achieve self-funding through its relatively strong operating cash flows as it continues to deleverage, and while the stock is undoubtedly cheap, in my view, its investment case remains rather risky overall. This is without considering the ethical concerns attached to investing in correctional facilities.
Latest Developments
Earlier in November, The GEO Group reported its Q3 results, with the company achieving revenues and AFFO/share of $557.2 million and $0.65, a decline of 3.8% and 3% year-over-year, respectively.
The GEO Group renewed eight of its facility contracts during this three-month period, including four immigration processing centers and four residential reentry centers under contract with the Federal Bureau of Prisons or state correctional agencies. The company also completed a six-month extension for its U.S. Marshals contract at the Western Regional Detention Facility in San Diego, California.
Year-to-date, the company reduced its net recourse debt by approximately $175 million, already meeting its previously articulated goal of reducing its net recourse debt by $150 million to $175 million for Fiscal 2021.
Following the short-term success regarding its deleveraging plans, management raised its 2021 guidance, forecasting AFFO/share of $2.57-$2.59 (previously $2.51-$2.57). This was due to GEO suspending the dividend entirely in April, which should help it deleverage faster.
At the midpoint of management’s guidance, the stock is trading at a P/AFFO of less than 2.8x. No matter how one sees GEO’s investment case, the stock is incredibly cheap even if we were to assume a consistent decline in revenues and AFFO in the medium term.
However, with the dividend suspended, which translates to no tangible capital returns to investors to be compensated for investing in such controversial security, I would too be reluctant to invest in GEO.
Wall Street’s Take
Turning to Wall Street, The GEO Group has a Moderate Buy consensus rating based on one Buy and one Hold assigned in the past three months.
At $12.25, the average GEO Group price target implies 71.8% upside potential, nonetheless.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
