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BOOKED: Prison Operator Sets Date To Become a REIT

December 19, 2012
The board of Boca Raton-based GEO Group Inc. unanimously authorized the correctional facilities company to take all necessary steps, including the divestiture of certain health care assets, in order to faciliate the company to operate as a REIT beginning Jan. 1, 2013.

"Based on our extensive work over the past few months, our board and our management team strongly believe that positioning GEO for a REIT conversion will maximize our company’s ability to create shareholder value given the nature of our assets, help lower our cost of capital, draw a larger base of potential shareholders, provide greater flexibility to pursue growth opportunities, and create a more efficient operating structure,” said George C. Zoley, GEO’s chairman, CEO and founder.

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GEO's decision appears to be part of a larger trend among companies opting to be REITs. A recent article in The Wall Street Journal noted how the potential for tax savings, increased dividends and higher stock valuations as a REIT holds strong appeal for a number of firms from outside the traditional REIT universe, including other prison operators as well as cell phone tower and golf course owners.

GEO's chairman contends his firm is in fundamentally a real estate intensive industry.

"Our present company profile has evolved over several years, during which time, we have developed and financed many new detention and correctional facilities for federal and state government clients," Zoley added.

In order to qualify for REIT eligibility, GEO said it will reorganize its operations into separate wholly-owned operating business units through a taxable REIT subsidiary. A small portion of GEO’s businesses, which are non-real estate related, such as GEO’s managed-only contracts, international operations, electronic monitoring services, and other non-residential facilities, will be held as part of wholly-owned taxable subsidiaries of the REIT; while most of GEO’s other business segments will be part of the REIT.

And because REIT rules substantially restrict the ability of REITs to directly or indirectly operate or manage health care services. As a result, GEO is required to divest all health care facility management contracts prior to the end of this month.

Under its wholly-owned subsidiary, GEO Care Inc., GEO currently holds six managed-only health care facility contracts, totaling 1,970 beds, and provides correctional mental health services for the Palm Beach County, Florida jail system through its residential treatment services division. It also provides correctional health care services in publicly-operated prisons in the State of Victoria, Australia through its Pacific Shores Healthcare subsidiary. These contracts and services generate $165 million in annual revenue.

GEO’s worldwide operations include 20,000 employees, 109 correctional, detention and residential treatment facilities, including projects under development, and 75,000 owned and/or managed beds. The jailer brought in nearly $1.6 billion in revenue last year.

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